##### Table of Contents



FORM 10-Q

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

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

For Quarter Ended: September 30, 2002

Commission File Number 1-13936

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

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 52-1940834                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

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

(781) 273-0300

---

(Registrants telephone number, including area code)


Not Applicable

---

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


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes 
(X)       No  (   )

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

Yes 
(X)       No  (   )

Number of shares of common stock, par value $.01 per share, outstanding
as of October 31, 2002: 4,471,160.





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TABLE OF CONTENTS



|                                                 |                                                                                                |                                                                                                 |  |  |  |  |  | 
|------------------------------------------------ | ---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|Part I  FINANCIAL INFORMATION                  
|                                                 | Item 1. Financial Statements:                                                                 
|                                                 |                                                                                                | Consolidated Balance Sheets                                                                    
|                                                 |                                                                                                | Consolidated Statements of Operations                                                          
|                                                 |                                                                                                | Consolidated Statements of Changes in Stockholders Equity Nine Months Ended September 30, 2002
|                                                 |                                                                                                | Consolidated Statements of Cash Flows                                                          
|                                                 |                                                                                                | Notes to Consolidated Financial Statements                                                     
|                                                 |                                                                                                | Average Balances and Yields/Costs                                                              
|                                                 | Item 2. MANAGEMENTSS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                 | Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                             
|                                                 | 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                                                      
|SIGNATURES                                      
|Ex-99.1 Certification of Chief Executive Officer
|Ex-99.2 Certification of Chief Financial Officer



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##### Table of Contents



BOSTONFED BANCORP INC.
FORM 10-Q
INDEX

|                               |  |         |  |                                                                                                                               |  |      
|------------------------------ |  | ------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | -----
|                               |  |         |  |                                                                                                                               |  | Page 
|                               |  |         |  |                                                                                                                               |  |      
|Part I  FINANCIAL INFORMATION |  |        
|                               |  |         |  |                                                                                                                               |  |      
|                               |  | Item 1. |  | Financial Statements:                                                                                                         |  |      
|                               |  |         |  |                                                                                                                               |  |      
|                               |  |         |  | Consolidated Balance Sheets as of September 30, 2002
(unaudited) and December 31, 2001                                        |  | 3    
|                               |  |         |  |                                                                                                                               |  |      
|                               |  |         |  | Consolidated Statements of Operations for the Three and Nine
Months ended September 30, 2002 and 2001 (unaudited)             |  | 4    
|                               |  |         |  |                                                                                                                               |  |      
|                               |  |         |  | Consolidated Statements of Changes in stockholders
Equity for the Three and Nine Months ended
September 30, 2002 (unaudited) |  | 5    
|                               |  |         |  |                                                                                                                               |  |      
|                               |  |         |  | Consolidated Statements of Cash Flows for the
Nine Months ended June 30, 2002 and 2001 (unaudited)                            |  | 6-7  
|                               |  |         |  |                                                                                                                               |  |      
|                               |  |         |  | Notes to Consolidated Financial Statements                                                                                    |  | 8-12 
|                               |  |         |  |                                                                                                                               |  |      
|                               |  |         |  | Average Balances and Yield / Costs                                                                                            |  | 13-14
|                               |  |         |  |                                                                                                                               |  |      
|                               |  | Item 2. |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                                         |  | 15-27
|                               |  |         |  |                                                                                                                               |  |      
|                               |  | Item 3. |  | Quantitative and Qualitative Disclosures About
Market Risk                                                                    |  | 27-29
|                               |  |         |  |                                                                                                                               |  |      
|                               |  | Item 4. |  | Controls and Procedures                                                                                                       |  | 29   
|                               |  |         |  |                                                                                                                               |  |      
|Part II  OTHER INFORMATION    |  |        
|                               |  |         |  |                                                                                                                               |  |      
|                               |  | Item 1. |  | Legal Proceedings                                                                                                             |  | 29   
|                               |  |         |  |                                                                                                                               |  |      
|                               |  | Item 2. |  | Changes in Securities and Use of Proceeds                                                                                     |  | 29   
|                               |  |         |  |                                                                                                                               |  |      
|                               |  | Item 3. |  | Defaults Upon Senior Securities                                                                                               |  | 29   
|                               |  |         |  |                                                                                                                               |  |      
|                               |  | Item 4. |  | Submission of Matters to a vote of Security Holders                                                                           |  | 29   
|                               |  |         |  |                                                                                                                               |  |      
|                               |  | Item 5. |  | Other Information                                                                                                             |  | 30   
|                               |  |         |  |                                                                                                                               |  |      
|                               |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                                              |  | 30   
|                               |  |         |  |                                                                                                                               |  |      
|Signature Page                 |  | 31     

2



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

|                                                                                                                                  |                                                                                                                                                                                             |                                                                                                                                 |           |               |         |              |           |         |         |  
|--------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | --------- | ------------- | ------- | ------------ | --------- | ------- | ------- | -
|                                                                                                                                  |                                                                                                                                                                                             |                                                                                                                                 |           | September 30, |         | December 31,
|                                                                                                                                  |                                                                                                                                                                                             |                                                                                                                                 |           | 2002          |         | 2001        
|                                                                                                                                  |                                                                                                                                                                                             |                                                                                                                                 |           |               |         |             
|Assets                                                                                                                            |                                                                                                                                                                                             | (Unaudited)                                                                                                                     |           |               |         |             
|Cash and cash equivalents                                                                                                         |                                                                                                                                                                                             | $                                                                                                                               | 82,594    |               |         | $            | 95,957    |        
|Investment securities available for sale
(amortized cost of $103,741 at September, 30
2002 and $62,868 at December 31, 2001)      |                                                                                                                                                                                             |                                                                                                                                 | 104,499   |               |         |              | 63,258    |        
|Investment securities held to maturity (fair
value of $568 at September 30, 2002 and $598
at December 31, 2001)                   |                                                                                                                                                                                             |                                                                                                                                 | 529       |               |         |              | 554       |        
|Mortgage-backed securities available for sale
(amortized cost of $108,931 at September 30,
2002 and $95,139 at December 31, 2001) |                                                                                                                                                                                             |                                                                                                                                 | 109,891   |               |         |              | 94,922    |        
|Mortgage-backed securities held to maturity (fair
value of $30,706 at September 30, 2002 and $41,547
at December 31, 2001)        |                                                                                                                                                                                             |                                                                                                                                 | 29,433    |               |         |              | 40,822    |        
|Loans held for sale                                                                                                               |                                                                                                                                                                                             |                                                                                                                                 | 28,040    |               |         |              | 24,612    |        
|Loans, net of allowance for loan losses of $13,018
and $12,328 at September 30, 2002 and December 31, 2001                        |                                                                                                                                                                                             |                                                                                                                                 | 1,103,804 |               |         |              | 1,055,798 |        
|Accrued interest receivable                                                                                                       |                                                                                                                                                                                             |                                                                                                                                 | 6,849     |               |         |              | 6,317     |        
|Stock in FHLB of Boston and Federal Reserve Bank                                                                                  |                                                                                                                                                                                             |                                                                                                                                 | 24,552    |               |         |              | 24,208    |        
|Premises and equipment, net                                                                                                       |                                                                                                                                                                                             |                                                                                                                                 | 10,366    |               |         |              | 10,295    |        
|Goodwill, net of amortization                                                                                                     |                                                                                                                                                                                             |                                                                                                                                 | 10,776    |               |         |              | 17,776    |        
|Other assets                                                                                                                      |                                                                                                                                                                                             |                                                                                                                                 | 41,160    |               |         |              | 36,347    |        
|                                                                                                                                  |                                                                                                                                                                                             |                                                                                                                                 |           |               |         |              |           |        
|Total assets                                                                                                                      |                                                                                                                                                                                             |                                                                                                                                 | 1,552,493 |               |         |              | 1,470,866 |        
|                                                                                                                                  |                                                                                                                                                                                             |                                                                                                                                 |           |               |         |              |           |        
|Liabilities and Stockholders Equity
Liabilities:                                                                                 |                                                                                                                                                                                             |                                                                                                                                 |           |               |         |              |           |        
|                                                                                                                                  | Deposit accounts                                                                                                                                                                            |                                                                                                                                 |           | 965,616       |         |              |           | 884,516 |        
|                                                                                                                                  | Federal Home Loan Bank advances and other
borrowings                                                                                                                                        |                                                                                                                                 |           | 448,675       |         |              |           | 449,000 |        
|                                                                                                                                  | Corporation-obligated mandatorily redeemable
capital securities                                                                                                                             |                                                                                                                                 |           | 32,000        |         |              |           | 32,000  |        
|                                                                                                                                  | Advance payments by borrowers for taxes
and insurance                                                                                                                                       |                                                                                                                                 |           | 2,801         |         |              |           | 2,614   |        
|                                                                                                                                  | Other liabilities                                                                                                                                                                           |                                                                                                                                 |           | 10,245        |         |              |           | 9,348   |        
|                                                                                                                                  |                                                                                                                                                                                             |                                                                                                                                 |           |               |         |              |           |        
|Total liabilities                                                                                                                 |                                                                                                                                                                                             |                                                                                                                                 | 1,459,337 |               |         |              | 1,377,478 |        
|Commitments and contingencies
Stockholders equity;                                                                               |                                                                                                                                                                                             |                                                                                                                                 |           |               |         |              |           |        
|                                                                                                                                  | Preferred stock, $ .01 par value, 1,000,000 shares
authorized; none issued                                                                                                                  |                                                                                                                                 |           |              |         |              |           |        |        
|                                                                                                                                  | Common stock, $0.01 par value, 17,000,000 shares
authorized; 6,589,617 shares issued (4,470,999 and
4,450,653 shares outstanding at September 30, 2002 and
December 31, 2001, respectively) |                                                                                                                                 |           | 66            |         |              |           | 66      |        
|                                                                                                                                  | Additional paid-in capital                                                                                                                                                                  |                                                                                                                                 |           | 69,124        |         |              |           | 68,259  |        
|                                                                                                                                  | Retained earnings                                                                                                                                                                           |                                                                                                                                 |           | 63,668        |         |              |           | 64,702  |        
|                                                                                                                                  | Accumulated other comprehensive income                                                                                                                                                      |                                                                                                                                 |           | 1,047         |         |              |           | 105     |        
|                                                                                                                                  |                                                                                                                                                                                             | Less: Treasury stock, at cost (2,118,618 shares
and 2,138,964 shares at September 30, 2002 and
December 31, 2001, respectively) |           |               | (40,199 | )            |           |         | (39,158 | )
|                                                                                                                                  |                                                                                                                                                                                             | Less: Unallocated ESOP shares                                                                                                   |           |               | (529    | )            |           |         | (529    | )
|                                                                                                                                  |                                                                                                                                                                                             | Less: Unearned Stock-Based Incentive Plan                                                                                       |           |               | (21     | )            |           |         | (57     | )
|                                                                                                                                  |                                                                                                                                                                                             |                                                                                                                                 |           |               |         |              |           |        
|Total stockholders equity                                                                                                        |                                                                                                                                                                                             |                                                                                                                                 | 93,156    |               |         |              | 93,388    |        
|                                                                                                                                  |                                                                                                                                                                                             |                                                                                                                                 |           |               |         |              |           |        
|Total liabilities and stockholders equity                                                                                        |                                                                                                                                                                                             | $                                                                                                                               | 1,552,493 |               |         | $            | 1,470,866 |        
|                                                                                                                                  |                                                                                                                                                                                             |                                                                                                                                 |           |               |         |              |           |        

See accompanying condensed notes to consolidated financial statements.

3



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##### Table of Contents






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

|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |        |        |        |        | 
|---------------------------------------------------------------- | ----------------------------------------------------------------------------- | -------------------------- | ------------------------- | ---------------------- | ------ | ------------------ | --------- | ----------------- | ----- | --------- | --------- | --------- | ------ | ------ | --------- | ------ | ------ | ------ | ------ | 
|                                                                 |                                                                               |                            |                           |                        |        | Three Months Ended |           | Nine Months Ended
|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                  
|                                                                 |                                                                               |                            |                           |                        |        | 9/30/2002          |           | 9/30/2001         |       | 9/30/2002 |           | 9/30/2001
|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |          
|                                                                 |                                                                               |                            |                           |                        |        | (Unaudited)        |           | (Unaudited)      
|Interest income:                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|                                                                 | Loans                                                                         |                            | $                         | 18,541                 |        |                    | $         | 20,638            |       |           | $         | 55,729    |        |        | $         | 62,098 |       
|                                                                 | Mortgage-backed securities                                                    |                            |                           | 2,234                  |        |                    |           | 2,151             |       |           |           | 6,301     |        |        |           | 5,191  |       
|                                                                 | Investment securities                                                         |                            |                           | 1,030                  |        |                    |           | 1,335             |       |           |           | 3,021     |        |        |           | 4,648  |       
|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|                                                                 |                                                                               |                            | Total interest income     |                        |        | 21,805             |           |                   |       | 24,124    |           |           |        | 65,051 |           |        |        | 71,937 |       
|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|Interest expense:                                                |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|                                                                 | Deposit accounts                                                              |                            |                           | 5,709                  |        |                    |           | 7,453             |       |           |           | 16,937    |        |        |           | 23,560 |       
|                                                                 | Borrowed funds                                                                |                            |                           | 5,538                  |        |                    |           | 6,392             |       |           |           | 17,105    |        |        |           | 17,674 |       
|                                                                 | Corporation obligated mandatorily
redeemable capital securities
distributions |                            |                           | 881                    |        |                    |           | 880               |       |           |           | 2,642     |        |        |           | 2,641  |       
|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|                                                                 |                                                                               |                            |                           | Total interest expense |        |                    | 12,128    |                   |       |           | 14,725    |           |        |        | 36,684    |        |        |        | 43,875 | 
|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|Net interest income                                              |                                                                               |                            | 9,677                     |                        |        |                    | 9,399     |                   |       |           | 28,367    |           |        |        | 28,062    |       
|Provision for loan losses                                        |                                                                               |                            | 350                       |                        |        |                    | 200       |                   |       |           | 850       |           |        |        | 620       |       
|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|Net interest
income after provision for loan losses              |                                                                               |                            | 9,327                     |                        |        |                    | 9,199     |                   |       |           | 27,517    |           |        |        | 27,442    |       
|Non-interest income:                                             |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|                                                                 | Deposit service fees                                                          |                            |                           | 789                    |        |                    |           | 620               |       |           |           | 2,194     |        |        |           | 1,802  |       
|                                                                 | Loan processing and servicing
fees                                            |                            |                           | (1,368                 | )      |                    |           | (134              | )     |           |           | (1,877    | )      |        |           | (20    | )     
|                                                                 | Gain on sale of loans                                                         |                            |                           | 2,994                  |        |                    |           | 2,807             |       |           |           | 8,593     |        |        |           | 7,538  |       
|                                                                 | Income from bank-owned life
insurance                                         |                            |                           | 313                    |        |                    |           | 314               |       |           |           | 916       |        |        |           | 935    |       
|                                                                 | Gain on sale of investments                                                   |                            |                           | 61                     |        |                    |           | 15                |       |           |           | 361       |        |        |           | 230    |       
|                                                                 | Other                                                                         |                            |                           | 327                    |        |                    |           | 598               |       |           |           | 1,153     |        |        |           | 1,434  |       
|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|                                                                 |                                                                               |                            | Total non-interest income |                        |        | 3,116              |           |                   |       | 4,220     |           |           |        | 11,340 |           |        |        | 11,919 |       
|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|Non-interest expense:                                            |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|                                                                 | Compensation and benefits                                                     |                            |                           | 6,218                  |        |                    |           | 5,316             |       |           |           | 17,843    |        |        |           | 15,968 |       
|                                                                 | Occupancy and equipment                                                       |                            |                           | 1,222                  |        |                    |           | 1,203             |       |           |           | 3,652     |        |        |           | 3,519  |       
|                                                                 | Data processing                                                               |                            |                           | 419                    |        |                    |           | 389               |       |           |           | 1,339     |        |        |           | 1,230  |       
|                                                                 | Advertising expense                                                           |                            |                           | 365                    |        |                    |           | 249               |       |           |           | 862       |        |        |           | 751    |       
|                                                                 | Federal deposit insurance
premiums                                            |                            |                           | 39                     |        |                    |           | 48                |       |           |           | 125       |        |        |           | 133    |       
|                                                                 | Real estate operations                                                        |                            |                           |                       |        |                    |           |                  |       |           |           |          |        |        |           | 7      |       
|                                                                 | Impairment/Amortization of goodwill                                           |                            |                           | 7,000                  |        |                    |           | 355               |       |           |           | 7,000     |        |        |           | 1,064  |       
|                                                                 | Legal settlements                                                             |                            |                           | 750                    |        |                    |           | 0                 |       |           |           | 1,250     |        |        |           | 0      |       
|                                                                 | Other                                                                         |                            |                           | 1,776                  |        |                    |           | 1,854             |       |           |           | 5,136     |        |        |           | 5,588  |       
|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|                                                                 |                                                                               | Total non-interest expense |                           |                        | 17,789 |                    |           |                   | 9,414 |           |           |           | 37,207 |        |           |        | 28,260 |       
|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|(Loss) Income before income taxes                                |                                                                               |                            | (5,346                    | )                      |        |                    | 4,005     |                   |       |           | 1,650     |           |        |        | 11,101    |       
|Income tax (benefit) expense                                     |                                                                               |                            | (1,816                    | )                      |        |                    | 1,377     |                   |       |           | 575       |           |        |        | 3,954     |       
|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|Net (loss) income                                                |                                                                               | $                          | (3,530                    | )                      |        | $                  | 2,628     |                   |       | $         | 1,075     |           |        | $      | 7,147     |       
|                                                                 |                                                                               |                            |                           |                        |        |                    |           |                   |       |           |           |           |        |        |           |       
|Basic (loss) earnings per share                                  |                                                                               | $                          | (0.80                     | )                      |        | $                  | 0.59      |                   |       | $         | 0.24      |           |        | $      | 1.60      |       
|Diluted (loss) earnings
per share                                |                                                                               | $                          | (0.80                     | )                      |        | $                  | 0.56      |                   |       | $         | 0.23      |           |        | $      | 1.51      |       
|Basic weighted average shares
outstanding                        |                                                                               |                            | 4,422,131                 |                        |        |                    | 4,451,460 |                   |       |           | 4,413,438 |           |        |        | 4,457,724 |       
|Common stock equivalents
due to dilutive effect
of stock options |                                                                               |                            | 300,480                   |                        |        |                    | 269,712   |                   |       |           | 274,637   |           |        |        | 264,492   |       
|Diluted total weighted average
shares outstanding                |                                                                               |                            | 4,722,611                 |                        |        |                    | 4,721,172 |                   |       |           | 4,688,075 |           |        |        | 4,722,216 |       

See accompanying condensed notes to consolidated financial statements.

4



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##### Table of Contents






BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity
Nine Months Ended September 30, 2002
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)

|                                                                                             |  |        |    |         |  |            |        |          |  |        |        |        |  |           |         |               |  |             |       |       |  |       |      |          |  |  |     |   |  |  |        |  
|-------------------------------------------------------------------------------------------- |  | ------ | -- | ------- |  | ---------- | ------ | -------- |  | ------ | ------ | ------ |  | --------- | ------- | ------------- |  | ----------- | ----- | ----- |  | ----- | ---- | -------- |  |  | --- | - |  |  | ------ | -
|                                                                                             |  |        |    |         |  |            |        |          |  |        |        |        |  |           |         |               |  | Accumulated |       |       |  |       |      | Unearned |  |  |     |  
|                                                                                             |  |        |    |         |  |            |        |          |  |        |        |        |  |           |         |               |  | other       |       |       |  |       |      | Stock-   |  |  |     |  
|                                                                                             |  |        |    |         |  | Additional |        |          |  |        |        |        |  |           |         | comprehensive |  | Unallocated |       | Based |  | Total
|                                                                                             |  | Common |    | paid-in |  | Retained   |        | Treasury |  | income |        | ESOP   |  | Incentive |         | stockholders'
|                                                                                             |  | stock  |    | capital |  | earnings   |        | stock    |  | (loss) |        | shares |  | Plan      |         | equity       
|                                                                                             |  |        |    |         |  |            |        |          |  |        |        |        |  |           |         |              
|Balance at December 31, 2001                                                                 |  | $      | 66 |         |  |            | 68,259 |          |  |        | 64,702 |        |  |           | (39,158 | )             |  |             | 105   |       |  |       | (529 | )        |  |  | (57 | ) |  |  | 93,388 |  
|Net income                                                                                   |  |        |   |         |  |            |       |          |  |        | 2,022  |        |  |           |        |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | 2,022  |  
|Change in net unrealized loss
on investments available for sale
(net of tax benefit of $284) |  |        |   |         |  |            |       |          |  |        |       |        |  |           |        |               |  |             | (445  | )     |  |       |     |          |  |  |    |   |  |  | (445   | )
|                                                                                             |  |        |    |         |  |            |        |          |  |        |        |        |  |           |         |               |  |             |       |       |  |       |      |          |  |  |     |   |  |  |        |  
|Total comprehensive income                                                                   |  |        |   |         |  |            |       |          |  |        |       |        |  |           |        |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | 1,577  |  
|Cash dividends declared and
paid ($0.15 per share)                                           |  |        |   |         |  |            |       |          |  |        | (672   | )      |  |           |        |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | (672   | )
|Common stock repurchased
(25,750 shares at an average
price of $24.32 per share)             |  |        |   |         |  |            |       |          |  |        |       |        |  |           | (626    | )             |  |             |      |       |  |       |     |          |  |  |    |   |  |  | (626   | )
|Stock options exercised                                                                      |  |        |   |         |  |            | 456    |          |  |        |       |        |  |           | 430     |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | 886    |  
|Allocation relating to earned
portion of Stock-Based
Incentive Plan                          |  |        |   |         |  |            |       |          |  |        |       |        |  |           |        |               |  |             |      |       |  |       |     |          |  |  | 14  |   |  |  | 14     |  
|Appreciation in fair value of
shares charged to expense for
compensation plans               |  |        |   |         |  |            | 199    |          |  |        |       |        |  |           |        |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | 199    |  
|                                                                                             |  |        |    |         |  |            |        |          |  |        |        |        |  |           |         |               |  |             |       |       |  |       |      |          |  |  |     |   |  |  |        |  
|Balance at March 31, 2002                                                                    |  | $      | 66 |         |  |            | 68,914 |          |  |        | 66,052 |        |  |           | (30,354 | )             |  |             | (340  | )     |  |       | (529 | )        |  |  | (43 | ) |  |  | 94,766 |  
|                                                                                             |  |        |    |         |  |            |        |          |  |        |        |        |  |           |         |               |  |             |       |       |  |       |      |          |  |  |     |   |  |  |        |  
|Net income                                                                                   |  |        |   |         |  |            |       |          |  |        | 2,583  |        |  |           |        |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | 2,583  |  
|Change in net unrealized gain
on investments available for sale
(net of tax $672)            |  |        |   |         |  |            |       |          |  |        |       |        |  |           |        |               |  |             | 1,052 |       |  |       |     |          |  |  |    |   |  |  | 1,052  |  
|                                                                                             |  |        |    |         |  |            |        |          |  |        |        |        |  |           |         |               |  |             |       |       |  |       |      |          |  |  |     |   |  |  |        |  
|Total comprehensive income                                                                   |  |        |   |         |  |            |       |          |  |        |       |        |  |           |        |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | 3,635  |  
|Cash dividends declared and
paid ($0.16 per share)                                           |  |        |   |         |  |            |       |          |  |        | (718   | )      |  |           |        |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | (718   | )
|Common stock repurchased
(60,080 shares at an average
price of $28.63 per share)             |  |        |   |         |  |            |       |          |  |        |       |        |  |           | (1,711  | )             |  |             |      |       |  |       |     |          |  |  |    |   |  |  | (1,711 | )
|Stock options exercised                                                                      |  |        |   |         |  |            | (396   | )        |  |        |       |        |  |           | 1,720   |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | 1,324  |  
|Allocation relating to earned
portion of Stock-Based
Incentive Plan                          |  |        |   |         |  |            |       |          |  |        |       |        |  |           |        |               |  |             |      |       |  |       |     |          |  |  | 12  |   |  |  | 12     |  
|Appreciation in fair value of
shares charged to expense for
compensation plans               |  |        |   |         |  |            | 255    |          |  |        |       |        |  |           |        |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | 255    |  
|                                                                                             |  |        |    |         |  |            |        |          |  |        |        |        |  |           |         |               |  |             |       |       |  |       |      |          |  |  |     |   |  |  |        |  
|Balance at June 30, 2002                                                                     |  | $      | 66 |         |  |            | 68,773 |          |  |        | 67,917 |        |  |           | (30,354 | )             |  |             | 712   |       |  |       | (529 | )        |  |  | (31 | ) |  |  | 97,563 |  
|                                                                                             |  |        |    |         |  |            |        |          |  |        |        |        |  |           |         |               |  |             |       |       |  |       |      |          |  |  |     |   |  |  |        |  
|Net loss                                                                                     |  |        |   |         |  |            |       |          |  |        | (3,530 | )      |  |           |        |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | (3,530 | )
|Change in net unrealized gain/(loss)
on investments available for sale
(net of tax $215)     |  |        |   |         |  |            |       |          |  |        |       |        |  |           |        |               |  |             | 335   |       |  |       |     |          |  |  |    |   |  |  | 335    |  
|                                                                                             |  |        |    |         |  |            |        |          |  |        |        |        |  |           |         |               |  |             |       |       |  |       |      |          |  |  |     |   |  |  |        |  
|Total comprehensive income                                                                   |  |        |   |         |  |            |       |          |  |        |       |        |  |           |        |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | (3,195 | )
|Cash dividends declared and
paid ($0.16 per share)                                           |  |        |   |         |  |            |       |          |  |        | (719   | )      |  |           |        |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | (719   | )
|Common stock repurchased
(60,735 shares at an average
price of $29.78 per share)             |  |        |   |         |  |            |       |          |  |        |       |        |  |           | (1,812  | )             |  |             |      |       |  |       |     |          |  |  |    |   |  |  | (1,812 | )
|Stock options exercised                                                                      |  |        |   |         |  |            | 75     |          |  |        |       |        |  |           | 958     |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | 1,033  |  
|Allocation relating to earned
portion of Stock-Based
Incentive Plan                          |  |        |   |         |  |            |       |          |  |        |       |        |  |           |        |               |  |             |      |       |  |       |     |          |  |  | 10  |   |  |  | 10     |  
|Appreciation in fair value of
shares charged to expense for
compensation plans               |  |        |   |         |  |            | 276    |          |  |        |       |        |  |           |        |               |  |             |      |       |  |       |     |          |  |  |    |   |  |  | 276    |  
|                                                                                             |  |        |    |         |  |            |        |          |  |        |        |        |  |           |         |               |  |             |       |       |  |       |      |          |  |  |     |   |  |  |        |  
|Balance at September 30, 2002                                                                |  | $      | 66 |         |  |            | 69,124 |          |  |        | 63,668 |        |  |           | (40,199 | )             |  |             | 1,047 |       |  |       | (529 | )        |  |  | (21 | ) |  |  | 93,156 |  
|                                                                                             |  |        |    |         |  |            |        |          |  |        |        |        |  |           |         |               |  |             |       |       |  |       |      |          |  |  |     |   |  |  |        |  

See accompanying condensed notes to consolidated financial statements.

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

|                                          |                                                                                             |                                                                                |                                                     |                          |          |                           |   |       |          |          |   | 
|----------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------- | ------------------------ | -------- | ------------------------- | - | ----- | -------- | -------- | - | 
|                                          |                                                                                             |                                                                                |                                                     |                          |          | For the Nine Months Ended
|                                          |                                                                                             |                                                                                |                                                     |                          |          | September 30,            
|                                          |                                                                                             |                                                                                |                                                     |                          |          |                          
|                                          |                                                                                             |                                                                                |                                                     |                          |          | 2002                      |   | 2001 
|                                          |                                                                                             |                                                                                |                                                     |                          |          |                           |   |      
|                                          |                                                                                             |                                                                                |                                                     |                          |          | (Unaudited)              
|Net cash flows from operating activities: |                                                                                             |                                                                                |                                                     |                          |          |                           |   |      
|                                          | Net income                                                                                  |                                                                                | $                                                   | 1,075                    |          |                           | $ | 7,147 |         
|                                          | Adjustments to reconcile net income to
net cash provided by (used in) operating
activities: |                                                                                |                                                     |                          |          |                           |   |       |         
|                                          |                                                                                             | Depreciation, impairment, amortization
and accretion, net                      |                                                     |                          | 8,406    |                           |   |       | 2,028    |         
|                                          |                                                                                             | Earned SIP shares                                                              |                                                     |                          | 36       |                           |   |       | 66       |         
|                                          |                                                                                             | Appreciation in fair value of shares
charged to expense for compensation plans |                                                     |                          | 730      |                           |   |       | 503      |         
|                                          |                                                                                             | Income from bank owned life insurance                                          |                                                     |                          | (603     | )                         |   |       | (934     | )       
|                                          |                                                                                             | Provision for loan losses                                                      |                                                     |                          | 850      |                           |   |       | 620      |         
|                                          |                                                                                             | Loans originated for sale                                                      |                                                     |                          | (484,226 | )                         |   |       | (384,727 | )       
|                                          |                                                                                             | Proceeds from sale of loans                                                    |                                                     |                          | 489,391  |                           |   |       | 370,752  |         
|                                          |                                                                                             | Gain on sale of loans                                                          |                                                     |                          | (8,593   | )                         |   |       | (7,538   | )       
|                                          |                                                                                             | Gain on sale of investment securities                                          |                                                     |                          | (361     | )                         |   |       | (230     | )       
|                                          |                                                                                             | Gain on sale of premises                                                       |                                                     |                          |         |                           |   |       | (217     | )       
|                                          |                                                                                             | Increase in accrued interest receivable                                        |                                                     |                          | (532     | )                         |   |       | (543     | )       
|                                          |                                                                                             | Increase in prepaid expenses
and other assets, net                             |                                                     |                          | (4,210   | )                         |   |       | (1,268   | )       
|                                          |                                                                                             | Increase in accrued expenses
and other liabilities, net                        |                                                     |                          | 293      |                           |   |       | 210      |         
|                                          |                                                                                             |                                                                                |                                                     |                          |          |                           |   |      
|                                          |                                                                                             |                                                                                | Net cash provided by (used in)
operating activities |                          |          | 2,256                     |   |       |          | (14,131  | )
|                                          |                                                                                             |                                                                                |                                                     |                          |          |                           |   |      
|Cash flows from investing activities:     |                                                                                             |                                                                                |                                                     |                          |          |                           |   |      
|                                          |                                                                                             | Proceeds from sale of investment
securities available for sale                 |                                                     |                          | 12,521   |                           |   |       | 3,628    |         
|                                          |                                                                                             | Proceeds from maturities of investment
securities held to maturity             |                                                     |                          | 25       |                           |   |       | 1,500    |         
|                                          |                                                                                             | Proceeds from maturities of investment
securities available for sale           |                                                     |                          | 2,003    |                           |   |       | 24,400   |         
|                                          |                                                                                             | Purchase of investment securities
available for sale                           |                                                     |                          | (56,246  | )                         |   |       | (30,053  | )       
|                                          |                                                                                             | Purchase of mortgage-backed securities
available for sale                      |                                                     |                          | (81,264  | )                         |   |       | (87,415  | )       
|                                          |                                                                                             | Purchase of FHLB and Federal Reserve Stock                                     |                                                     |                          | (344     | )                         |   |       | (3,559   | )       
|                                          |                                                                                             | Principal payments on mortgage-backed
securities available for sale            |                                                     |                          | 67,335   |                           |   |       | 10,929   |         
|                                          |                                                                                             | Principal payments on mortgage-backed
securities held to maturity              |                                                     |                          | 11,376   |                           |   |       | 10,697   |         
|                                          |                                                                                             | Principal payments on investment
securities available for sale                 |                                                     |                          | 1,135    |                           |   |       | 661      |         
|                                          |                                                                                             | Increase in loans, net                                                         |                                                     |                          | (48,856  | )                         |   |       | (41,797  | )       
|                                          |                                                                                             | Purchases of premises and equipment                                            |                                                     |                          | (1,251   | )                         |   |       | (1,499   | )       
|                                          |                                                                                             | Proceeds from sale of real estate owned                                        |                                                     |                          |         |                           |   |       | 147      |         
|                                          |                                                                                             | Proceeds from sale of premises                                                 |                                                     |                          |         |                           |   |       | 790      |         
|                                          |                                                                                             | Additional investment in real estate owned                                     |                                                     |                          |         |                           |   |       | (2       | )       
|                                          |                                                                                             |                                                                                |                                                     |                          |          |                           |   |      
|                                          |                                                                                             |                                                                                | Net cash used in
investing activities               |                          |          | (93,566                   | ) |       |          | (111,573 | )
|                                          |                                                                                             |                                                                                |                                                     |                          |          |                           |   |      
|                                          |                                                                                             |                                                                                |                                                     | -Continued on next page- |          |                           |   |       |          |          |   | 

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

|                                                  |                                                                   |                                                     |                                           |          |                           |        |        |          |        |         | 
|------------------------------------------------- | ----------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------- | -------- | ------------------------- | ------ | ------ | -------- | ------ | ------- | 
|                                                  |                                                                   |                                                     |                                           |          | For the Nine Months Ended
|                                                  |                                                                   |                                                     |                                           |          | September 30,            
|                                                  |                                                                   |                                                     |                                           |          |                          
|                                                  |                                                                   |                                                     |                                           |          | 2002                      |        | 2001  
|                                                  |                                                                   |                                                     |                                           |          |                           |        |       
|                                                  |                                                                   |                                                     |                                           |          | (Unaudited)              
|Cash flows from financing activities:             |                                                                   |                                                     |                                           |          |                           |        |        |         
|                                                  | Increase in deposit accounts                                      |                                                     | $                                         | 81,100   |                           |        | $      | 21,505   |       
|                                                  | Repayments of Federal Home Loan
Bank advances                     |                                                     |                                           | (335,681 | )                         |        |        | (361,984 | )     
|                                                  | Proceeds from Federal Home Loan
Bank advances                     |                                                     |                                           | 335,356  |                           |        |        | 484,650  |       
|                                                  | Cash dividends paid                                               |                                                     |                                           | (2,109   | )                         |        |        | (1,973   | )     
|                                                  | Common stock repurchased                                          |                                                     |                                           | (4,149   | )                         |        |        | (5,843   | )     
|                                                  | Options exercised, net of taxes                                   |                                                     |                                           | 3,243    |                           |        |        | 1,625    |       
|                                                  | Increase in advance payments
by borrowers for taxes and insurance |                                                     |                                           | 187      |                           |        |        | 121      |       
|                                                  |                                                                   |                                                     |                                           |          |                           |        |        |         
|                                                  |                                                                   |                                                     | Net cash provided by
financing activities |          |                           | 77,947 |        |          |        | 138,101 | 
|                                                  |                                                                   |                                                     |                                           |          |                           |        |        |         
|                                                  |                                                                   | Net (decrease)increase
in cash and cash equivalents |                                           |          | (13,363                   | )      |        |          | 12,397 |        
|Cash and cash equivalents at beginning of period  |                                                                   |                                                     | 95,957                                    |          |                           |        | 50,675 |         
|                                                  |                                                                   |                                                     |                                           |          |                           |        |        |         
|Cash and cash equivalents at end of period        |                                                                   | $                                                   | 82,594                                    |          |                           | $      | 63,072 |         
|                                                  |                                                                   |                                                     |                                           |          |                           |        |        |         
|Supplemental disclosure of cash flow information: |                                                                   |                                                     |                                           |          |                           |        |        |         
|                                                  | Payments during the period for:                                   |                                                     |                                           |          |                           |        |        |          |       
|                                                  | Interest                                                          |                                                     | $                                         | 36,804   |                           |        | $      | 43,733   |       
|                                                  |                                                                   |                                                     |                                           |          |                           |        |        |         
|                                                  | Taxes                                                             |                                                     | $                                         | 3,336    |                           |        | $      | 3,393    |       
|                                                  |                                                                   |                                                     |                                           |          |                           |        |        |         

See accompanying condensed notes to consolidated financial statements.

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

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

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

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goodwill related to its acquisition of
Diversified Ventures, Inc., doing business as Forward Financial Company.
Due primarily to a decline in the volume of loan sales of manufactured
housing loans, resulting from the continuing recession in the
manufactured housing industry, the Companys valuation assessment
resulted in an impairment charge of $7.0 million, or approximately $4.6
million, net of taxes, during the third quarter of 2002. After this
impairment charge, the Company had $10.8 million of goodwill on its
balance sheet at September 30, 2002, $7.8 million of which is
attributable to Forward Financial Company. No amortization of goodwill
is being recorded. In the event that manufactured housing loan sales
materially decline further, or the severity of the manufactured housing
recession delays the return to normal volumes of production beyond
managements expectations, further impairment assessments could result in
additional goodwill adjustments in accordance with FAS 142.

The Company also maintains an additional intangible asset,
Originated Mortgage Servicing Rights (OMSR), which represent the
present value of future loan servicing fees, net of expected costs to
service, based on certain assumptions. During the quarter ended
September 30, 2002, the Company added $1.5 million, with an expected
weighted average life of 4.48 years, to the OMSR. The Company incurred a
$1.7 million impairment charge related to its OMSR, due primarily to a
record volume of mortgage loan prepayments and the utilization of more
rapid prepayment speeds in valuing the remaining OMSRs. The balance of
OMSR at September 30, 2002 was $7.4 million with an expected weighted
average life of 4.07 years. The OMSR represents approximately 71 basis
points of the loan balances serviced for others.

NOTE 2:  COMMITMENTS, CONTINGENCIES AND CONTRACTS

At September 30, 2002, the Company had commitments of $135.5 million
to originate mortgage loans and $2.0 million to purchase loans from
correspondent lenders. Of these $137.5 million commitments, $87.3
million were adjustable rate mortgage loans with interest rates ranging
from 4.63% to 8.50% and $50.2 million were fixed rate mortgage loans with
interest rates ranging from 5.13% to 8.75%. The Company also had
commitments to sell $111.1 million of mortgage loans.

At September 30, 2002, the Company was servicing first mortgage
loans of approximately $1.04 billion, which are either partially or
wholly-owned by others.

The Commonwealth of Massachusetts Department of Revenue (DOR)
issued Notices of Assessments (notices) for additional taxes and
interest to each of the Companys two Banks for the tax years ended
December 31, 1999 and 2000. The notices stipulate that the additional
taxes and interest in the amounts of $1.5 million and $242,000,
respectively, relate to the denied claim of dividends received deduction
pertaining to the Banks Real Estate Investment Trusts (REITS).
Similar to other banks operating in the Commonwealth of Massachusetts
with similar REIT subsidiaries that have also received such notices from
the DOR, the Banks excluded 95% of the dividends that they received from
the REITS for state tax purposes when the tax returns were prepared. The
DOR has challenged this deduction, arguing that such distributions are
not considered dividends for purposes of the Internal Revenue Code and,
as such, cannot be deducted for state tax purposes. The Banks believe
that their tax treatment of the dividends is valid under Massachusettss
law. The Banks intend to file a dispute of the DOR findings and appeal
the DORs proposed assessments. Accordingly, the Banks intend to
continue their current accounting practice of estimating their tax
provision under the assumption that their dividend deductions for prior
periods are valid, and they claimed the dividends received deduction when
they filed their December 31, 2001 excise tax returns. Adhering to the
DORs contention, the Company could potentially be assessed an additional
$2.6 million of state taxes, not including additional interest, through
September 30, 2002.

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NOTE 3:  LEGAL SETTLEMENTS

During the quarter ended September 30, 2002, the Company settled a
lawsuit, which had been filed against its indirect subsidiary, Forward
Financial Company, by a bank in New York State. The Company incurred a
cost of $750,000 during the third quarter to settle the lawsuit,
resulting in a reduction in earnings per share of approximately $.09 per
share.

During the quarter ended March 31, 2002, the Company settled a
lawsuit, which had been filed against its subsidiary, Broadway National
Bank. The Company incurred a cost of $500,000 during the first quarter
to settle the lawsuit, resulting in a reduction in earnings per share of
approximately $.07 during the first quarter.

NOTE 4:  BUSINESS SEGMENTS

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

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

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

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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 September 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 three months
ended September 30, 2001: |                              |  |                        |           |     |  |          |         |       |  |              |           |        |  |      |         |   |  |      |          |              |  |        |          
|                                                     | Interest Income              |  | $                      | 21,718    |     |  |          | 2,322   |       |  |              | 24,040    |        |  |      | 1,198   |   |  |      | (1,114   | )            |  |        | 24,124    |  
|                                                     | Interest expense             |  |                        | 13,393    |     |  |          | 658     |       |  |              | 14,051    |        |  |      | 1,788   |   |  |      | (1,114   | )            |  |        | 14,725    |  
|                                                     | Provision for loan losses    |  |                        | 163       |     |  |          | 37      |       |  |              | 200       |        |  |      |         |   |  |      |          |              |  |        | 200       |  
|                                                     | Non-interest income          |  |                        | 3,915     |     |  |          | 290     |       |  |              | 4,205     |        |  |      | 15      |   |  |      |          |              |  |        | 4,220     |  
|                                                     | Non-interest expense         |  |                        | 8,110     |     |  |          | 1,157   |       |  |              | 9,267     |        |  |      | 147     |   |  |      |          |              |  |        | 9,414     |  
|                                                     | Income tax expense (benefit) |  |                        | 1,371     |     |  |          | 244     |       |  |              | 1,615     |        |  |      | (238    | ) |  |      |          |              |  |        | 1,377     |  
|                                                     | Net income (loss)            |  |                        | 2,596     |     |  |          | 516     |       |  |              | 3,112     |        |  |      | (484    | ) |  |      |          |              |  |        | 2,628     |  
|                                                     | Total assets                 |  |                        | 1,305,274 |     |  |          | 163,985 |       |  |              | 1,469,259 |        |  |      | 162,898 |   |  |      | (156,241 | )            |  |        | 1,475,916 |  
|Net interest margin                                  |                              |  | 2.79                   | %         |     |  | 4.75     | %       |       |  | n.m          |           |        |  | n.m. |         |   |  | n.m. |          |              |  | 2.80   | %        
|Return on average assets                             |                              |  | 0.81                   | %         |     |  | 1.29     | %       |       |  | n.m          |           |        |  | n.m. |         |   |  | n.m. |          |              |  | 0.73   | %        
|Return on average equity                             |                              |  | 11.05                  | %         |     |  | 16.22    | %       |       |  | n.m          |           |        |  | n.m. |         |   |  | n.m. |          |              |  | 11.21  | %        
|n.m. = not meaningful                                |                              |  |                        |           |     |  |          |         |       |  |              |           |        |  |      |         |   |  |      |          |              |  |        |          

|                                                    |                              |  |                        |           |     |  |          |         |       |  |              |           |        |  |      |         |   |  |      |          |              |  |       |           | 
|--------------------------------------------------- | ---------------------------- |  | ---------------------- | --------- | --- |  | -------- | ------- | ----- |  | ------------ | --------- | ------ |  | ---- | ------- | - |  | ---- | -------- | ------------ |  | ----- | --------- | 
|                                                    |                              |  | (Dollars in thousands)
|                                                    |                              |  |                       
|                                                    |                              |  |                        |           |     |  |          |         |       |  | TOTAL        |           |        |  |      |         |   |  |      |          |              |  |      
|                                                    |                              |  |                        |           |     |  |          |         |       |  | REPORTABLE   |           |        |  |      |         |   |  |      |          | CONSOLIDATED
|                                                    |                              |  | BFS                    |           | BNB |  | SEGMENTS |         | OTHER |  | ELIMINATIONS |           | TOTALS
|                                                    |                              |  |                        |           |     |  |          |         |       |  |              |           |       
|At or for the nine months
ended September 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                            |                              |  | 0.18                   | %         |     |  | 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  | %        
|At or for the nine months
ended September 30, 2001: |                              |  |                        |           |     |  |          |         |       |  |              |           |        |  |      |         |   |  |      |          |              |  |       |          
|                                                    | Interest Income              |  | $                      | 64,656    |     |  |          | 7,101   |       |  |              | 71,757    |        |  |      | 3,655   |   |  |      | (3,475   | )            |  |       | 71,937    | 
|                                                    | Interest expense             |  |                        | 39,982    |     |  |          | 2,003   |       |  |              | 41,985    |        |  |      | 5,365   |   |  |      | (3,475   | )            |  |       | 43,875    | 
|                                                    | Provision for loan losses    |  |                        | 508       |     |  |          | 112     |       |  |              | 620       |        |  |      |         |   |  |      |          |              |  |       | 620       | 
|                                                    | Non-interest income          |  |                        | 10,826    |     |  |          | 863     |       |  |              | 11,689    |        |  |      | 230     |   |  |      |          |              |  |       | 11,919    | 
|                                                    | Non-interest expense         |  |                        | 24,092    |     |  |          | 3,512   |       |  |              | 27,604    |        |  |      | 656     |   |  |      |          |              |  |       | 28,260    | 
|                                                    | Income tax expense (benefit) |  |                        | 3,865     |     |  |          | 793     |       |  |              | 4,658     |        |  |      | (704    | ) |  |      |          |              |  |       | 3,954     | 
|                                                    | Net income (loss)            |  |                        | 7,035     |     |  |          | 1,544   |       |  |              | 8,579     |        |  |      | (1,432  | ) |  |      |          |              |  |       | 7,147     | 
|                                                    | Total assets                 |  |                        | 1,305,274 |     |  |          | 163,985 |       |  |              | 1,469,259 |        |  |      | 162,898 |   |  |      | (156,241 | )            |  |       | 1,475,916 | 
|Net interest margin                                 |                              |  | 2.87                   | %         |     |  | 5.01     | %       |       |  | n.m          |           |        |  | n.m. |         |   |  | n.m. |          |              |  | 2.91  | %        
|Return on average assets                            |                              |  | 0.77                   | %         |     |  | 1.33     | %       |       |  | n.m          |           |        |  | n.m. |         |   |  | n.m. |          |              |  | 0.69  | %        
|Return on average equity                            |                              |  | 10.31                  | %         |     |  | 16.12    | %       |       |  | n.m          |           |        |  | n.m. |         |   |  | n.m. |          |              |  | 10.27 | %        
|n.m. = not meaningful                               |                              |  |                        |           |     |  |          |         |       |  |              |           |        |  |      |         |   |  |      |          |              |  |       |          

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NOTE 5:  RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections.SFAS No. 145, among other
things, addresses financial accounting and reporting of gains and losses
from extinguishment of debt. SFAS No. 145 requires gains and losses
resulting from the extinguishment of debt to be classified as
extraordinary items only if they meet the criteria in Accounting
Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions.This statement rescinds SFAS No. 4, Reporting Gains
and Losses from Extinguishment of Debt,SFAS No. 64, Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements,and amends SFAS No. 13,
Accounting for Leases.SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002, with early application encouraged. The
Company does not believe the adoption of this statement will have a
material impact on the Companys financial position or results of
operations.

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

|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |      |      |  
|---------------------------------------------------------------- | ------------------------------------- | ------------------------------------------ | ------- | ---------------------- | --------- | -------- | ----- | ------ | ------ | ------- | ----- | -------- | ---- | ---- | ------- | --------- | --------- | ------ | ----- | ------ | ------ | ------- | ----- | ---- | ---- | -
|                                                                 |                                       |                                            |         | 2002                   |           | 2001    
|                                                                 |                                       |                                            |         |                        |           |         
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       | 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)             |                                            | $       | 123,125                |           |          | $     | 1,030  |        |         |       | 3.35     | %    |      | $       | 100,200   |           |        | $     | 1,335  |        |         |       | 5.33 | %   
|                                                                 | Loan, net and loans held for sale (2) |                                            |         | 1,139,154              |           |          |       | 18,541 |        |         |       | 6.51     | %    |      |         | 1,103,395 |           |        |       | 20,638 |        |         |       | 7.48 | %   
|                                                                 | Mortgage-backed securities (3)        |                                            |         | 156,490                |           |          |       | 2,234  |        |         |       | 5.71     | %    |      |         | 136,925   |           |        |       | 2,151  |        |         |       | 6.28 | %   
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|                                                                 |                                       | Total interest-earning assets              |         |                        | 1,418,769 |          |       |        | 21,805 |         |       |          | 6.15 | %    |         |           | 1,340,520 |        |       |        | 24,124 |         |       |      | 7.20 | %
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|Non interest-earning assets                                      |                                       |                                            | 109,926 |                        |           |          |       |        |        |         |       |          |      |      | 106,101 |           |           |        |       |        |        |         |       |     
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|                                                                 |                                       | Total assets                               |         |                        | 1,528,695 |          |       |        |        |         |       |          |      |      |         |           | 1,446,621 |        |       |        |        |         |       |      |      |  
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|Liabilities and Stockholders Equity:                            |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|Interest-bearing Liabilities:                                    |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|                                                                 | Money market deposit accounts         |                                            |         | 62,083                 |           |          |       | 250    |        |         |       | 1.61     | %    |      |         | 54,015    |           |        |       | 349    |        |         |       | 2.58 | %   
|                                                                 | Savings accounts                      |                                            |         | 207,560                |           |          |       | 749    |        |         |       | 1.44     | %    |      |         | 176,605   |           |        |       | 1,026  |        |         |       | 2.32 | %   
|                                                                 | Now accounts                          |                                            |         | 140,887                |           |          |       | 113    |        |         |       | 0.32     | %    |      |         | 127,355   |           |        |       | 170    |        |         |       | 0.53 | %   
|                                                                 | Certificate accounts                  |                                            |         | 428,087                |           |          |       | 4,597  |        |         |       | 4.30     | %    |      |         | 410,269   |           |        |       | 5,908  |        |         |       | 5.76 | %   
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|                                                                 |                                       | Total                                      |         |                        | 838,617   |          |       |        | 5,709  |         |       |          | 2.72 | %    |         |           | 768,244   |        |       |        | 7,453  |         |       |      | 3.88 | %
|Borrowed Funds (4)                                               |                                       |                                            | 449,177 |                        |           |          | 5,538 |        |        |         | 4.93  | %        |      |      | 459,424 |           |           |        | 6,392 |        |        |         | 5.57  | %   
|Corporation-obligated mandatorily
redeemable capital securities  |                                       |                                            | 32,000  |                        |           |          | 881   |        |        |         | 11.01 | %        |      |      | 32,000  |           |           |        | 880   |        |        |         | 11.00 | %   
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|                                                                 |                                       | Total interest-bearing liabilities         |         |                        | 1,319,794 |          |       |        | 12,128 |         |       |          | 3.68 | %    |         |           | 1,259,668 |        |       |        | 14,725 |         |       |      | 4.68 | %
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|Non interest-bearing liabilities                                 |                                       |                                            | 108,524 |                        |           |          |       |        |        |         |       |          |      |      | 93,211  |           |           |        |       |        |        |         |       |     
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|                                                                 |                                       | Total liabilities                          |         |                        | 1,428,318 |          |       |        |        |         |       |          |      |      |         |           | 1,352,879 |        |       |        |        |         |       |      |      |  
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|Stockholders Equity                                             |                                       |                                            | 100,377 |                        |           |          |       |        |        |         |       |          |      |      | 93,742  |           |           |        |       |        |        |         |       |     
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|                                                                 |                                       | Total liabilities and
stockholders equity |         | $                      | 1,528,695 |          |       |        |        |         |       |          |      |      |         | $         | 1,446,621 |        |       |        |        |         |       |      |      |  
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|Net interest rate spread (5)                                     |                                       |                                            |         |                        |           | $        | 9,677 |        |        |         | 2.47  | %        |      |      |         |           |           | $      | 9,399 |        |        |         | 2.52  | %   
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|Net interest margin (6)                                          |                                       |                                            |         |                        |           |          |       |        |        |         | 2.73  | %        |      |      |         |           |           |        |       |        |        |         | 2.80  | %   
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     
|Ratio of interest-earning assets to
interest-bearing liabilities |                                       |                                            | 107.50  | %                      |           |          |       |        |        |         |       |          |      |      | 106.42  | %         |           |        |       |        |        |         |       |     
|                                                                 |                                       |                                            |         |                        |           |          |       |        |        |         |       |          |      |      |         |           |           |        |       |        |        |         |       |     



---

|(1) |  | Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold. (2)
Amount is net of deferred loan origination costs, construction loans in process,
net unearned discount on loans purchased and allowance for loan losses and
includes non-performing loans.                                            
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(3) |  | Includes mortgage-backed securities available for sale and held to maturity.                                                                                                                                                                                                                                                                                                                 
|   
|(4) |  | Interest paid on borrowed funds for the periods presented includes interest
expense on FNMA deposits held in escrow accounts with the Company related to the
Companys FNMA servicing, which, if such interest expense was excluded, would
result in an average cost of borrowed funds of 4.92% and 5.55% for the three
months ended September 30, 2002 and September 30, 2001, respectively.
|   
|(5) |  | Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.                                                                                                                                                                                                              
|   
|(6) |  | Net interest margin represents net interest income as a percentage of
average interest-earning assets.                                                                                                                                                                                                                                                                                       

13



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##### Table of Contents



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

|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |      |      |  
|---------------------------------------------------------------- | ------------------------------------- | ------------------------------------------ | ------- | ---------------------- | --------- | -------- | ------ | ------ | ------ | ------- | ----- | -------- | ---- | ---- | ------- | --------- | --------- | ------ | ------ | ------ | ------ | ------- | ----- | ---- | ---- | -
|                                                                 |                                       |                                            |         | 2002                   |           | 2001    
|                                                                 |                                       |                                            |         |                        |           |         
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       | 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)             |                                            | $       | 121,648                |           |          | $      | 3,021  |        |         |       | 3.31     | %    |      | $       | 100,142   |           |        | $      | 4,648  |        |         |       | 6.19 | %   
|                                                                 | Loan, net and loans held for sale (2) |                                            |         | 1,103,561              |           |          |        | 55,729 |        |         |       | 6.73     | %    |      |         | 1,076,888 |           |        |        | 62,098 |        |         |       | 7.69 | %   
|                                                                 | Mortgage-backed securities (3)        |                                            |         | 146,048                |           |          |        | 6,301  |        |         |       | 5.75     | %    |      |         | 107,811   |           |        |        | 5,191  |        |         |       | 6.42 | %   
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|                                                                 |                                       | Total interest-earning assets              |         |                        | 1,371,257 |          |        |        | 65,051 |         |       |          | 6.32 | %    |         |           | 1,284,841 |        |        |        | 71,937 |         |       |      | 7.46 | %
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|Non-interest-earning assets                                      |                                       |                                            | 110,956 |                        |           |          |        |        |        |         |       |          |      |      | 102,102 |           |           |        |        |        |        |         |       |     
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|                                                                 |                                       | Total assets                               |         |                        | 1,482,213 |          |        |        |        |         |       |          |      |      |         |           | 1,386,943 |        |        |        |        |         |       |      |      |  
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|Liabilities and Stockholders Equity:                            |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|Interest-bearing Liabilities:                                    |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|                                                                 | Money market deposit accounts         |                                            |         | 60,850                 |           |          |        | 744    |        |         |       | 1.63     | %    |      |         | 54,374    |           |        |        | 1,111  |        |         |       | 2.72 | %   
|                                                                 | Savings accounts                      |                                            |         | 194,480                |           |          |        | 2,114  |        |         |       | 1.45     | %    |      |         | 172,416   |           |        |        | 3,304  |        |         |       | 2.55 | %   
|                                                                 | Now accounts                          |                                            |         | 138,786                |           |          |        | 337    |        |         |       | 0.32     | %    |      |         | 126,653   |           |        |        | 603    |        |         |       | 0.63 | %   
|                                                                 | Certificate accounts                  |                                            |         | 404,056                |           |          |        | 13,742 |        |         |       | 4.53     | %    |      |         | 412,780   |           |        |        | 18,542 |        |         |       | 5.99 | %   
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|                                                                 |                                       | Total                                      |         |                        | 798,172   |          |        |        | 16,937 |         |       |          | 2.83 | %    |         |           | 766,223   |        |        |        | 23,560 |         |       |      | 4.10 | %
|Borrowed Funds (4)                                               |                                       |                                            | 444,768 |                        |           |          | 17,105 |        |        |         | 5.13  | %        |      |      | 406,519 |           |           |        | 17,674 |        |        |         | 5.80  | %   
|Corporation-obligated mandatorily
redeemable capital securities  |                                       |                                            | 32,000  |                        |           |          | 2,642  |        |        |         | 11.01 | %        |      |      | 32,000  |           |           |        | 2,641  |        |        |         | 11.00 | %   
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|                                                                 |                                       | Total interest-bearing liabilities         |         |                        | 1,274,940 |          |        |        | 36,684 |         |       |          | 3.83 | %    |         |           | 1,204,742 |        |        |        | 43,875 |         |       |      | 4.85 | %
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|Non-interest-bearing liabilities                                 |                                       |                                            | 108,864 |                        |           |          |        |        |        |         |       |          |      |      | 89,404  |           |           |        |        |        |        |         |       |     
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|                                                                 |                                       | Total liabilities                          |         |                        | 1,383,804 |          |        |        |        |         |       |          |      |      |         |           | 1,294,146 |        |        |        |        |         |       |      |      |  
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|Stockholders Equity                                             |                                       |                                            | 98,409  |                        |           |          |        |        |        |         |       |          |      |      | 92,797  |           |           |        |        |        |        |         |       |     
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|                                                                 |                                       | Total liabilities and
stockholders equity |         | $                      | 1,482,213 |          |        |        |        |         |       |          |      |      |         | $         | 1,386,943 |        |        |        |        |         |       |      |      |  
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|Net interest rate spread (5)                                     |                                       |                                            |         |                        |           | $        | 28,367 |        |        |         | 2.49  | %        |      |      |         |           |           | $      | 28,062 |        |        |         | 2.61  | %   
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|Net interest margin (6)                                          |                                       |                                            |         |                        |           |          |        |        |        |         | 2.76  | %        |      |      |         |           |           |        |        |        |        |         | 2.91  | %   
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     
|Ratio of interest-earning assets to
interest-bearing liabilities |                                       |                                            | 107.55  | %                      |           |          |        |        |        |         |       |          |      |      | 106.65  | %         |           |        |        |        |        |         |       |     
|                                                                 |                                       |                                            |         |                        |           |          |        |        |        |         |       |          |      |      |         |           |           |        |        |        |        |         |       |     



---

|(1) |  | Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold. (2)
Amount is net of deferred loan origination costs, construction loans in process,
net unearned discount on loans purchased and allowance for loan losses and
includes non-performing loans.                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(3) |  | Includes mortgage-backed securities available for sale and held to maturity.                                                                                                                                                                                                                                                                                                                
|   
|(4) |  | Interest paid on borrowed funds for the periods presented includes interest
expense on FNMA deposits held in escrow accounts with the Company related to the
Companys FNMA servicing, which, if such interest expense was excluded, would
result in an average cost of borrowed funds of 5.10% and 5.78% for the nine
months ended September 30, 2002 and September 30, 2001, respectively.
|   
|(5) |  | Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.                                                                                                                                                                                                             
|   
|(6) |  | Net interest margin represents net interest income as a percentage of
average interest-earning assets.                                                                                                                                                                                                                                                                                      

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##### Table of Contents








|Item 2. |  | MANAGEMENTSS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | --------------------------------------------------------------------------------------



| |            
| | -----------
| | A.  GENERAL



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition to historical information, this 10-Q includes certain
forward-looking statements based on current management expectations.
Generally, verbs in the future tense and the words, believe, expect,
anticipate, intends, opinion, potential, and similar expressions
identify forward-looking statements. Examples of this forward-looking
information can be found in, but are not limited to, the expected effects
of accounting pronouncements applicable to the Company
operations, the allowance for losses discussion,
subsequent events and any quantitative and qualitative disclosure about
market risk. The Companys actual results could differ materially from
those management expectations. Factors that could cause future results
to vary from current management expectations include, but are not limited
to, general economic conditions, legislative and regulatory changes,
monetary and fiscal policies of the federal government, changes in tax
policies, rates and regulations of federal, state and local tax
authorities, changes in interest rates, deposit flows, the cost of funds,
demand for loan products, demand for financial services, competition,
changes in the quality or composition of the Companys loan and
investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and
technological factors and the effects of war or terrorist activities
affecting the Companys operations, markets, products, services and
prices. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on
such statements. Further information concerning the Company and its
business, including additional factors that could materially affect the
Companys financial results, is included in the Companys filings with
the Securities and Exchange Commission.
|
| | The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions, which may be
made to any forward-looking statements, to reflect events or
circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | The Company, headquartered in Burlington, Massachusetts, was
organized in 1995 under Delaware law as the holding company for BFS, in
connection with the conversion of BFS from a mutual to a stock form of
ownership. The Company later acquired BNB, a nationally-chartered
commercial bank, as its wholly-owned subsidiary in February 1997. In
December 1999, the Company acquired Diversified Ventures, Inc., d/b/a
Forward Financial Company (Forward Financial) and Ellsmere Insurance
Agency, Inc., (Ellsmere). Forward Financial operates as a subsidiary
of BFS and Ellsmere has limited operations as a subsidiary of BNB.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | The Companys business has been conducted primarily through its
wholly-owned subsidiaries of BFS and BNB (collectively, the Banks).
BFS operates its administrative/bank branch office located in Burlington,
Massachusetts and its eight other bank branch offices located in
Arlington, Bedford, Billerica, Boston, Lexington, Peabody, Wellesley and
Woburn, all of which are located in the greater Boston metropolitan area.
BFS subsidiary, Forward Financial, maintains its headquarters in
Northborough, Massachusetts and operates in approximately one-half the
states of the nation. BNB operates two banking offices in Chelsea and
Revere, both of which are also in the greater Boston metropolitan area.
Through its subsidiaries, the Company attracts retail deposits from the
general public and invests those deposits and other borrowed funds in
loans, mortgage-backed securities, U.S. Government and federal agency
securities and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

15



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | other securities. The Company originates mortgage loans
for its investment portfolio and for sale and generally retains the
servicing rights of loans it sells. Additionally, the Company originates
chattel mortgage loans, substantially all of which are sold in the
secondary market, servicing released. Loan sales are made from loans
held in the Companys portfolio designated as being held for sale or
originated for sale during the period. The Companys revenues are
derived principally from interest on its loans, and to a lesser extent,
interest and dividends on its investment and mortgage-backed securities,
gains on sale of loans and service fees. The Companys primary sources
of funds are deposits, principal and interest payments on loans and
mortgage-backed securities, interest, maturities or sales of investments,
Federal Home Loan Bank of Boston (FHLB) advances and proceeds from the
sale of loans.                                                                        
|
| | The Companys results of operations are primarily dependent on net
interest income, which is the difference between the income earned on its
loan and investment portfolios and its cost of funds, consisting of the
interest paid on deposits, borrowings and corporation obligated
mandatorily redeemable capital securities distributions, (trust
preferred securities) expense. Results of operations are also affected
by the Companys provision for loan losses, investment activities, gains
or losses on sale of loans, fees and amortization or adjustments to
originated mortgage servicing rights. The Companys non-interest expense
principally consists of compensation and benefits, occupancy and
equipment expense, advertising, data processing expense, and other
expenses. Results of operations of the Company are also significantly
affected by general economic and competitive conditions, particularly
changes in interest rates, government policies and actions of regulatory
authorities.
|
| | Each of the Banks is considered a business segment and accordingly,
the Company has complied with the segment reporting requirement in Note 3
of this document and in discussion herein as appropriate. As a result of
the acquisition of BNB, the Company became a bank holding company subject
to regulation by the Federal Reserve Bank (FRB). BFS is regulated by
the Office of Thrift Supervision (OTS) and BNB is regulated by the
Office of the Comptroller of the Currency (OCC).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | B.  FINANCIAL CONDITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Total assets at September 30, 2002 were $1.552 billion, compared to
$1.471 billion at December 31, 2001, an increase of $81.6 million.
Increased balances in investment securities available for sale,
mortgage-backed securities available for sale and loans, net, more than
offset decreases in cash and cash equivalents and mortgage-backed
securities held to maturity. Cash and cash equivalents declined to $82.6
million at September 30, 2002, from a balance of $96.0 million at
December 31, 2001 as some of the liquidity was used to fund purchases of
investment securities available for sale, which increased by $41.2
million to a balance of $104.5 million at September 30,
2002. Such liquidity was primarily invested in an adjustable-rate mortgage mutual
fund. Mortgage-backed securities available for sale increased to a
balance of $109.9 million at September 30, 2002, from $94.9 million at
December 31, 2001, as a result of investments in collateralized
mortgage-backed securities (CMOs). Loans, net, increased by $48.0
million to a balance of $1.104 billion at September 30, 2002, compared to
a balance of $1.056 billion at December 31, 2001 as the Company was able
to increase its loan portfolio, despite a heavy volume of loans
refinanced due to lower market interest rates.

16



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| |                                                                
| | ---------------------------------------------------------------
| | The Companys loan portfolio was comprised of the following at:

|                                         |                             |                    |           |                |           |          |         |         |           | 
|---------------------------------------- | --------------------------- | ------------------ | --------- | -------------- | --------- | -------- | ------- | ------- | --------- | 
|                                         |                             |                    |           | (In
thousands)
|                                         |                             |                    |           | 9/30/02        |           | 12/31/01
|                                         |                             |                    |           |                |           |         
|                                         |                             |                    |           | (Unaudited)    |           |          |         |        
|Mortgage loans:                          |                             |                    |           |                |           |          |         |        
|                                         | Residential 1-4 family      |                    | $         | 724,139        |           |          | $       | 763,599 |          
|                                         | Multi-family                |                    |           | 17,471         |           |          |         | 25,904  |          
|                                         | Construction and land       |                    |           | 133,880        |           |          |         | 99,337  |          
|                                         | Commercial real estate      |                    |           | 125,077        |           |          |         | 107,767 |          
|                                         |                             |                    |           |                |           |          |         |        
|                                         |                             |                    | 1,000,567 |                |           |          | 996,607 |        
|                                         |                             |                    |           |                |           |          |         |        
|Consumer and other loans:                |                             |                    |           |                |           |          |         |        
|                                         | Home equity and improvement |                    |           | 93,023         |           |          |         | 66,539  |          
|                                         | Secured by deposits         |                    |           | 499            |           |          |         | 678     |          
|                                         | Consumer                    |                    |           | 3,685          |           |          |         | 3,439   |          
|                                         | Business                    |                    |           | 47,407         |           |          |         | 28,103  |          
|                                         |                             |                    |           |                |           |          |         |        
|                                         |                             |                    | 144,614   |                |           |          | 98,759  |        
|                                         |                             |                    |           |                |           |          |         |        
|                                         |                             | Total loans, gross |           |                | 1,145,181 |          |         |         | 1,095,366 | 
|                                         |                             |                    |           |                |           |          |         |        
|Allowance for loan losses                |                             |                    | (13,018   | )              |           |          | (12,328 | )      
|Construction loans in process            |                             |                    | (32,071   | )              |           |          | (30,264 | )      
|Net unearned discount on loans purchased |                             |                    | 40        |                |           |          | 48      |        
|Deferred loan origination costs          |                             |                    | 3,672     |                |           |          | 2,976   |        
|                                         |                             |                    |           |                |           |          |         |        
|                                         |                             | Loans, net         |           | $              | 1,103,804 |          |         | $       | 1,055,798 | 
|                                         |                             |                    |           |                |           |          |         |        



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As noted in the above table, the allowance for loan losses amounted
to $13.0 million at September 30, 2002. Management believes the
allowance is adequate to absorb probable loan losses. The allowance for
loan losses increased from $12.3 million at December 31, 2001 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, 2002:

|                              |                |   |                |      |  
|----------------------------- | -------------- | - | -------------- | ---- | -
|                              |                |   | (In thousands)
|Balance at December 31, 2001  |                | $ | 12,328         |     
|                              | Loss provision |   |                | 850  |  
|                              | Recoveries     |   |                | 296  |  
|                              | Charge-offs    |   |                | (456 | )
|Balance at September 30, 2002 |                | $ | 13,018         |     

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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
future events, including changes in local, regional and national
economic conditions, changes in local, regional and national real
estate markets 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 is required is sub-standard.
At September 30, 2002, the Company classified $13.2 million of loans
($12.2 million at BFS and $1.0 million at BNB) as sub-standard compared
to $2.7 million ($1.8 million of BFS and $911,000 of BNB) at December 31,
2001. The vast majority of the increase in sub-standard loans was due to
three borrower relationships becoming sub-standard (and non-performing)
representing six loans, which consist of $6.3 million of land
development and $1.8 million commercial loan. Non-performing assets at September 30, 2002, which include the three
borrower relationships mentioned above, amounted to $10.1 million or .65%
of total assets, compared to $1.2 million, or .08% of total assets, at
December 31, 2001. The Asset Classification Committee, which meets
quarterly, determines the adequacy of the allowance for loan losses
through ongoing analysis of historical loss experience, the composition
of the loan portfolios,                                          

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2002 was sufficient to provide for anticipated losses
inherent in the loan portfolio.                                                                                                                                                                                                                                                                                                                                            
|
| | The Companys $13.0 million allowance for loan losses at September
30, 2002 represented 129% of non-performing loans or 1.14% of total
loans, compared to $12.3 million at December 31, 2001, or 1,065% of
non-performing loans and 1.13% of total loans. Management believes this
coverage ratio is prudent due to the balance increase in the combined
total of construction and land, commercial real estate, multi-family,
home equity and improvement, consumer and business loans. These combined
total balances increased from approximately $331.1 million at December
31, 2001 to approximately $420.5 million at September 30, 2002.
|
| | The amount of interest income on non-performing loans that would
have been recorded had these loans been current in accordance with their
original terms, was $701,000 and $61,000 for the nine-month periods ended
September 30, 2002 and 2001, respectively. The amount of interest income
that was recorded on these loans was $568,000 and $29,000 for the nine
month periods ended September 30, 2002 and 2001, respectively.                                                                                                                                                                                                            
|
| | At September 30, 2002, there were 4 loans characterized as impaired.
During the nine months ended September 30, 2002, the average recorded
value of impaired loans was $2.66 million, $367,000 interest income was
recognized and $327,000 of interest income would have been recognized
under the loans original terms during the nine-months ended September
30, 2002.                                                                                                                                                                                                                                                                     
|
| | Deposit accounts increased by $81.1 million, from $884.5 million at
December 31, 2001 to $965.6 million at September 30, 2002 as deposit
flows have increased slightly. Of the $81.1 million increase in
deposits, $48.0 million was in wholesale brokered-deposits, bringing the
total of brokered deposits to $139.8 million. Federal Home Loan Bank
(FHLB) advances and other borrowings are essentially the same at $448.7
million at September 30, 2002, compared to $449.0 million at December 31,
2001.                                                                                                                              

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

|                                           |                      |                                |         |                |         |          |         |         |         | 
|------------------------------------------ | -------------------- | ------------------------------ | ------- | -------------- | ------- | -------- | ------- | ------- | ------- | 
|                                           |                      |                                |         | (In
thousands)
|                                           |                      |                                |         | 9/30/02        |         | 12/31/01
|                                           |                      |                                |         |                |         |         
|                                           |                      |                                |         | (Unaudited)    |         |          |         |        
|Now                                        |                      | $                              | 146,036 |                |         | $        | 138,528 |        
|Regular & satement savings                 |                      |                                | 212,245 |                |         |          | 180,966 |        
|Money market                               |                      |                                | 62,557  |                |         |          | 58,133  |        
|Demand deposits & official checks          |                      |                                | 111,002 |                |         |          | 110,776 |        
|                                           |                      |                                |         |                |         |          |         |        
|                                           |                      | Total non-certificate accounts |         |                | 531,840 |          |         |         | 488,403 | 
|                                           |                      |                                |         |                |         |          |         |        
|Certificate accounts:                      |                      |                                |         |                |         |          |         |        
|                                           | 3 to 6 months        |                                |         | 54,942         |         |          |         | 65,507  |        
|                                           | 9 months             |                                |         |               |         |          |         |        |        
|                                           | 1 to 3 years         |                                |         | 247,336        |         |          |         | 233,275 |        
|                                           | Greater than 3 years |                                |         | 84,784         |         |          |         | 53,701  |        
|                                           | IRA/KEOGH            |                                |         | 46,714         |         |          |         | 43,630  |        
|                                           |                      |                                |         |                |         |          |         |        
|                                           |                      | Total certificate accounts     |         |                | 433,776 |          |         |         | 396,113 | 
|                                           |                      |                                |         |                |         |          |         |        
|                                           |                      | $                              | 965,616 |                |         | $        | 884,516 |        
|                                           |                      |                                |         |                |         |          |         |        
|Expected maturity of certificate accounts: |                      |                                |         |                |         |          |         |        
|                                           | Within one year      |                                | $       | 218,379        |         |          | $       | 247,745 |        
|                                           | One to two years     |                                |         | 98,125         |         |          |         | 79,236  |        
|                                           | Two to three years   |                                |         | 77,519         |         |          |         | 38,611  |        
|                                           | Over three years     |                                |         | 39,753         |         |          |         | 30,521  |        
|                                           |                      |                                |         |                |         |          |         |        
|                                           |                      | $                              | 433,776 |                |         | $        | 396,113 |        
|                                           |                      |                                |         |                |         |          |         |        

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | C.  LIQUIDITY AND CAPITAL RESOURCES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | The primary source of cash flow for the Company is dividend payments
from BFS and BNB, sales and maturities of investment securities and, to a
lesser extent, earnings on deposits held by the Company. Dividend
payments have primarily been used to fund stock repurchase programs, pay
dividends to stockholders, interest on trust preferred securities and
other operating expenses of the Company. The ability of BFS and BNB to
pay dividends and other capital distributions to the Company is generally
limited by OTS and OCC regulations, respectively. Additionally, the OTS
and OCC may prohibit the payment of dividends that are otherwise
permissible by regulation for safety and soundness reasons. As of
September 30, 2002, BFS and BNB had $17.4 million of dividends that could
be paid to the Company without regulatory approval and the Company had
$6.5 million of securities available for sale and $7.0 million cash or
cash equivalents. Any dividend by BFS or BNB beyond its current year net
income combined with retained net income of the preceding two years would
require notification to or approval of the OTS or the OCC. To the extent
BFS or BNB were to apply for a dividend distribution to the Company in
excess of the regulatory permitted dividend amounts, no assurances can be
made such application would be approved by the regulatory authorities.
The Banks primary sources of funds are deposits, (including brokered
deposits), principal and interest payments on loans, sales of loans,
sales or maturities of investments, mortgage-backed and related
securities and borrowing from the FHLB. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition. Management has maintained adequate
liquidity so that it may invest any excess liquidity in higher yielding
interest-earning assets or use such funds to repay higher cost FHLB
advances. Neither the OTS nor the OCC provide specific guidance for
liquidity ratios for BFS and BNB, respectively, but do require the Banks
to maintain reasonable and prudent liquidity levels. Management believes
such levels are being maintained.
|
| | The Companys and Banks most liquid assets are cash, overnight
federal funds sold, and loans and investments available for sale. The
levels of these assets are dependent on the Companys operating,
financing, lending and investing activities during any given period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



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

|                                              |  |                |         |              |  |   |         | 
|--------------------------------------------- |  | -------------- | ------- | ------------ |  | - | ------- | 
|                                              |  | September 30,  |         | December 31,
|                                              |  | 2002           |         | 2001        
|                                              |  |                |         |             
|                                              |  | (In Thousands)
|Cash and cash equivalents                     |  | $              | 82,594  |              |  | $ | 95,957  | 
|Investment securities
available for sale      |  |                | 104,499 |              |  |   | 63,258  | 
|Mortgage-backed securities
available for sale |  |                | 109,891 |              |  |   | 94,922  | 
|Loans held for sale                           |  |                | 28,040  |              |  |   | 24,612  | 
|                                              |  |                |         |              |  |   |         | 
|Total liquid assets                           |  | $              | 325,024 |              |  | $ | 278,749 | 
|                                              |  |                |         |              |  |   |         | 

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | These amounts represent 20.9% and 19.0% of the Companys total
assets at September 30, 2002 and December 31, 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | The Banks have other sources of liquidity if a need for additional
funds arises, including FHLB advances, wholesale-brokered deposits and
repurchase agreements (collateralized borrowings). At September 30,
2002, the Banks had $448.7 million in advances outstanding from the FHLB
and had, with existing collateral, an additional $68.8 million in overall
borrowing capacity from the FHLB. Borrowing capacity can also be further
increased upon delivery of mortgage notes on non-owner occupied 1-4
family loans, multi-family and commercial loans. The Banks generally do
not pay the highest deposit rates in their market and accordingly utilize
alternative sources of funds such as FHLB advances and wholesale-brokered
deposits to supplement cash flow needs.
|
| | At September 30, 2002, the Banks had commitments to originate loans
and unused outstanding lines of credit totaling $318.0 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, 2002,
totaled $218.4 million.                                                                                                                                                                                                                                                                                                                                                                                           
|
| | At September 30, 2002, the consolidated stockholders equity to
total assets ratio was 6.0%. As of September 30, 2002, the Company, BFS
and BNB exceeded all of their regulatory capital requirements. The
Companys consolidated total risk-based capital, tier 1 risk-based
capital and tier 1 leverage capital ratios were 12.8%, 11.4% and 7.4%,
respectively. BFSs tier 1 (core) capital, total risk-based, capital,
tier 1 risk-based and tangible equity capital ratios were 6.5%, 11.1%,
9.8% and 6.5%, respectively. BNBs risk-based total capital, risk-based
tier 1 capital and leverage capital ratios were 13.4%, 12.2% and 6.0%,
respectively.                                                                                                                   

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | D.  COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | GENERAL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | During the quarter ended September 30, 2002, the Company recorded a
net loss of $3.5 million, or $.80 basic and diluted loss per share,
compared to net income of $2.6 million, or $.59 basic and $.56 diluted
earnings per share for the third quarter of 2001. The primary reason for
the current quarters loss was the tax-deductible goodwill impairment
charge of $7.0 million, ($4.6 million, net after tax). At September 30,
2002, the Company reassessed the carrying amount of goodwill related to
its acquisition of Forward Financial Company. Due primarily to a decline
in the volume of loan sales of manufactured housing loans, resulting from
the continuing recession in the manufactured housing industry, the
Companys valuation assessment resulted in an impairment charge. After
this impairment charge, the Company had $10.8 million of goodwill on its
balance sheet at September 30, 2002, $7.8 million of which is
attributable to Forward Financial Company. Due to the implementation
of SFAS No. 142, no amortization of goodwill
is currently being recorded. Additionally, the Company incurred a $1.7 million
impairment charge related to its OMSR, due primarily to a record volume
of mortgage loan prepayments and the utilization of more rapid prepayment
speeds in valuing the remaining OMSRs. The Company also incurred an
expense of $750,000, (approximately $500,000 net after tax), to settle a
lawsuit during the quarter. Through the nine months ended September 30,
2002, earnings were $1.1 million, or $.24 basic and $.23 diluted earnings
per share, compared to $7.1 million, or $1.60 basic and $1.51 diluted
earnings per share for the nine months ended September 30, 2001.
Excluding the goodwill impairment charge and the legal settlement, but
including the OMSR impairment, the current quarters income was
approximately $1.5 million, or $.34 basic and $.32 diluted earnings per
share. In addition to the above items, year-to-date earnings were also
impacted by the settling of a legal dispute at BNB during the first
quarter. Excluding the cost of the settlement of the two legal disputes
and the goodwill impairment, earnings were approximately $6.4 million,
net of taxes, or $1.46 basic and $1.37 diluted earnings per share.
Earnings per share for the nine months ended September 30, 2001,
excluding amortization of goodwill, were $1.76 basic and $1.66 diluted.
For the nine-months ended September 30, 2002 and 2001, the annualized
return on average stockholders equity was 1.46% and 10.27%,
respectively. Comments regarding the components of net income are
detailed in the following paragraphs.
|
| | Interest Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Total interest income on interest-earning assets for the quarter
ended September 30, 2002 declined by $2.3 million, or 9.5%, to $21.8
million, compared to the quarter ended September 30, 2001. The decrease
in interest income was due to a 105 basis point decline in the average
yield on interest earning assets, partially offset by the earnings on the
$78.2 million increase in average interest-earning assets. The average
yield on interest-earning assets declined to 6.15% for the three months
ended September 30, 2002 from 7.20% for the three-months ended September
30, 2001. Total interest income for the nine months ended September 30,
2002 was $65.1 million, a decrease of $6.9 million, or 9.6%, compared to
the $71.9 million interest earned for the nine months ended September 30,
2001. The decline in interest income in the current period was caused by
the 114 basis point drop in the average yield, partially offset by the
earnings on the $86.4 million increase in average interest earning
assets. The reduced yields are due in part to the repricing of a portion
of the Companys adjustable-rate portfolio, based on much lower indexes
resulting from the Federal Reserve induced decline in market interest
rates during 2001. 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 in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest income on loans, net, for the quarter ended September 30,
2002 declined by $2.1 million, or 10.2%, to $18.5 million compared to
$20.6 million for the comparable quarter in 2001. For the nine months
ended September 30, 2002, interest income on loans, net, declined $6.4
million, or 10.3%, to $55.7 million, compared to $62.1 million for the
nine months ended September 30, 2001. The decrease in interest income
from loans, net, for the current nine month period was due to the 96
basis point decline in the average yield, partially offset by the
earnings on the $26.7 million increase in the average balance of loans,
net. The average yield on loans, net for the nine months ended September
30, 2002 was 6.73%, compared to an average yield of 7.69% for the nine
months ended September 30, 2001. 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 essentially all fixed-rate longer term loans
into the secondary market in order to better protect against rising interest
rates.                                                                                                                                                                        
|
| | Interest on mortgage-backed securities for the quarter ended
September 30, 2002 was $2.2 million, approximately the same as for the
quarter ended September 30, 2001. The income remained stable, despite a
57 basis point decrease in the average yield, due to growth of $19.6
million in average balance. The average balance of mortgage-backed
securities increased from $136.9 million for the quarter ended September
30, 2001 to an average of $156.5 million during the current quarter. For
the nine months ended September 30, 2002, the average balance of
mortgage-backed securities was $146.0 million, compared to an average
balance of $107.8 million for the nine months ended September 30, 2001.
The increase in average balances was primarily attributable to the
acquisition of collateralized mortgage obligations (CMOs). These
investments were purchased as part of the Companys effort to leverage
the trust-preferred securities, which are classified as capital for
regulatory purposes. Average yields declined from 6.42% for the nine
months ended September 30, 2001, to 5.75% for the current nine-month
period.                                                                                                                                                                                                                                                                           
|
| | Income from investment securities was $1.0 million for the three
months ended September 30, 2002, compared to $1.3 million for the prior
year quarter. The average balance of investment securities increased to
$123.1 million for the three months ended September 30, 2002, compared to
$100.2 million for the prior year quarter. The decline in income was
caused by a reduction in the average yield, which declined from 5.33% for
the three months ended September 30, 2001 to 3.35% for the current
quarter. The reduction in yields on investment securities is also
reflective of the declines in market interest rates; especially the
historically low rates being paid on federal funds and Federal Home Loan
Bank overnight deposits. Although the average balance of investment
securities increased by $21.5 million for the nine months ended September
30, 2002, compared to the nine months ended September 30, 2001, interest
income declined from $4.6 million for the prior year period to $3.0
million for the current year period. Because the Companys investment
securities are generally of a shorter-term nature, the decline in market
interest rates has had a significant impact on the overall yield of
investment securities. The average yield of investment securities for
the nine months ended September 30, 2002 was 3.31%, compared to 6.19% for
the nine months ended September 30, 2001.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The most recent 50 basis point decline in short-term interest rates
induced by the Federal Reserve Board on November 6, 2002, will further
exacerbate the yields of the loan and investment portfolios, especially
the assets repricing based on short-term indexes and the investments that
are generally of short-term duration. Additionally, this decline in
interest rates may precipitate another wave of mortgage loan
re-financings, which could result in the cash payments being reinvested
at lower yields.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Interest Expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Total interest expense on interest-bearing liabilities for the
quarter ended September 30, 2002 declined by $2.6 million, or 17.7%, to
$12.1 million compared to $14.7 million for the quarter ended September
30, 2001. The decrease in interest expense for the current quarter was
primarily due to a 100 basis point reduction in the average cost of
interest bearing liabilities, offset somewhat by the interest cost
applicable to a $60.1 million increase in the average balance of
interest-bearing liabilities, which averaged $1.320 billion during the
current quarter, compared to an average balance of $1.260 billion during
the quarter ended September 30, 2001. The average cost of
interest-bearing liabilities decreased to 3.68% during the quarter ended
September 30, 2002, compared to 4.68% for last years comparable quarter.
For the nine months ended September 30, 2002, interest expense on
interest-bearing liabilities totaled $36.7 million, compared to $43.9
million for the nine months ended September 30, 2001, a decrease of $7.2
million, or 16.4%. The lower interest expense in the current period is
due to the 102 basis point decline in the average cost of funds, which
declined to 3.83% in the nine months ended September 30, 2002, compared
to 4.85% in the prior year period. The Companys cost of interest
bearing liabilities has declined slower than overall market interest
rates as market conditions, the already low interest rates being paid on
deposits and longer term FHLB advances have precluded further substantial
declines in the interest paid on these interest-bearing liabilities.
|
| | Interest expense on deposit accounts was $5.7 million for the
quarter ended September 30, 2002, a decrease of $1.8 million from the
$7.5 million for the quarter ended September 30, 2001. Interest expense
on deposit accounts declined due to a 116 basis point decrease in the
average cost of deposits. For the three months ended September 30, 2002,
the average cost of deposits was 2.72%, compared to 3.88% for the three
months ended September 30, 2001. Average balances of deposit accounts,
at $838.6 million, were $70.4 million higher during the quarter ended
September 30, 2002, compared to average balances of $768.2 million for
the prior year quarter. For the nine months ended September 30, 2002,
interest expense on deposit accounts was $16.9 million, compared to $23.6
million for the prior year period, a decrease of $6.7 million. The
decrease is attributable to a 127 basis point decline in the average cost
of deposit accounts in the nine months ended September 30, 2002, compared
to the prior year period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Interest expense on borrowed funds was $5.5 million and $17.1
million for the three and nine months ended September 30, 2002, compared
to $6.4 million and $17.7 million for the three and nine months ended
September 30, 2001. Borrowed funds declined to an average of $449.2
million during the three months ended September 30, 2002 from an average
of $459.4 million for the prior year quarter. For the nine months ended
September 30, 2002, the average balance of borrowed funds was $444.8
million compared to an average balance of $406.5 million during the nine
months ended September 30, 2001, an increase of $38.3 million. The
average cost of borrowed funds was 5.13% for the nine months ended
September 30, 2002, a decline of 67 basis points, compared to the 5.80%
cost of borrowed funds for the nine months ended September 30, 2001. The
average cost of borrowed funds has not declined as rapidly or to the same
extent as the cost of deposits due primarily to the longer average term
of advances compared to deposits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net Interest Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Net interest income for the three months ended September 30, 2002
was $9.7 million compared to $9.4 million for the three months ended
September 30, 2001. The Company was able to expand its net interest
income through leveraging, despite a seven basis point decrease in the
net interest margin. The net interest margin for the quarter ended
September 30, 2002 was 2.73%, compared to 2.80% for the prior years
third quarter. The net interest rate spread declined from 2.52% for the
quarter ended September 30, 2001, to 2.47% for the current quarter. For
the nine months ended September 30, 2002, net interest income was $28.4
million, compared to $28.1 million for the nine months ended September
30, 2001. The net interest margin in the current period averaged 2.76%,
compared to 2.91% for the nine months ended September 30, 2001. The
Company has experienced net interest margin pressure due to increases in
non-performing loans and the effects of declining asset yields, which
have exceeded the Companys ability to reduce liability costs
commensurate with the historic reductions in market interest rates. The
Company cannot predict when interest rates will rise to more normal
levels and whether such increases will result in higher net interest
margins.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Provision for Loan Losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | The provision for loan losses was $350,000 for the quarter ended
September 30, 2002, compared to $200,000 for the comparable period last
year. On a year to date basis, the provision for loan losses was
$850,000, compared to $620,000 for the nine months ended September 30,
2001. The increase in the provision was due to the increased level of
non-performing loans and the higher balances invested in commercial real
estate loans, business loans and other higher yielding loans. 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 declined to $3.1 million for the quarter
ended September 30, 2002, compared to $4.2 million for the quarter ended
September 30, 2001 due primarily to lower loan processing and servicing
fees resulting from the OMSR impairment charge. Loan processing and
servicing fees were a negative $1.4 million for the quarter ended
September 30, 2002 compared to a negative $134,000 for the quarter ended
September 30, 2001. For the nine months ended September 30, 2002, loan
processing and servicing fees were a negative $1.9 million, compared to a
negative $20,000 for the nine months ended September 30, 2001. The
declines were due to adjustments for the impairment of OMSRs mentioned
above. Gain on sale of loans amounted to $3.0 million for the quarter
ended September 30, 2002, compared to $2.8 million for the quarter ended
September 30, 2001. For the nine months ended September 30, 2002, gain
on sale of loans amounted to $8.6 million, compared to $7.5 million for
the prior nine-month period. The increased gain on sale of loans
resulted from a continuation of high volumes of one- to four-family
mortgage loan sales, made possible by the volume of lending activity,
especially fixed-rate one- to four-family mortgages, 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 $3.3
million for the nine months ended September 30, 2002, compared to $4.3
million for the nine months ended September 30, 2001, resulting from
reduced activity in the manufactured housing market. Deposit service
fees increased from $620,000 in the quarter ended September 30, 2001, to
$789,000 in the current quarter. On a year-to-date basis, deposit
service fees amounted to $2.2 million, compared to $1.8 million for the
nine months ended September 30, 2001. The increase

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | was primarily due to
increases in fees and higher levels of deposit account services activity.
Other non-interest income was lower in the current quarter and on a
year-to-date basis due to the Companys interest in the NYCE bank
automated teller machine clearing network, which was sold, resulting in
the recognition of a $273,000 gain and a gain of $157,000 on the sale of
BFSs former Billerica Office location during the third and second
quarters of 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Non-Interest Expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Non-interest expenses include compensation and benefits, which
increased to $6.2 million for the current quarter, compared to $5.3
million for the quarter ended September 30, 2001. The primary reasons
for the increase are normal year-over-year employee expense increases,
higher than usual sales commissions and expenses incurred for loan
originations and the Companys accrual of approximately $200,000 for its
defined benefit pension plan (the plan). The Company has not incurred
an expense for this plan for over a decade as the plan sponsor was in an
over-funded status. Compensation and benefits increased to $17.8 million
for the nine months ended September 30, 2002 from $16.0 million for the
comparable prior year period due primarily to the above-mentioned
reasons. On a year-to-date basis, goodwill impairment was $7.0 million
as explained above. The nine months ended September 30, 2001 included
amortization of goodwill of $1.1 million. During the current quarter the
Company settled a lawsuit with the payment of $750,000, which combined
with the lawsuit settled during the first quarter of this year, results
in legal settlement costs of $1.3 million. Other non-interest expense
declined in the current three- and nine-month periods, compared to last
years as the three and nine months ended September 30, 2001 included
higher outside professional fees and a variety of other increased
expenses.
|
| | Income Tax Expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Income tax expense for the nine months ended September 30, 2002 was
$575,000, for an effective tax rate of 34.9%. For the nine months ended
September 30, 2001, income tax expense was $4.0 million, for an effective
tax rate of 35.6%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            






|Item 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|------- |  | ---------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | One of the principal market risks affecting the Company is interest
rate risk. The objective of the Companys interest rate risk management
function is to evaluate the interest rate risk included in certain
balance sheet accounts, determine the level of risk appropriate given the
Companys business strategy, operating environment, capital and liquidity
requirements and performance objectives, and manage the risk consistent
with Board of Directors approved guidelines. Through such management,
the Company seeks to reduce the vulnerability of its operations to
changes in interest rates. The Company monitors its interest rate risk
as such risk relates to its operating strategies. The Companys Board of
Directors has established a management Asset/Liability Committee that is
responsible for reviewing the Companys asset/liability policies and
interest rate risk position. The Committee reports trends and interest
rate risk position to the Board of Directors on a quarterly basis. The
extent of the movement of interest rates is an uncertainty that could
have a negative impact on the earnings of the Company.
|
| | In recent years, the Company has utilized the following strategies
to manage interest rate risk: (1) emphasizing the origination and
retention of adjustable-rate, one-to four-family mortgage loans; (2)
generally selling in the secondary market substantially all fixed-rate
mortgage                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

27



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | loans originated with terms greater than 15 years while
generally retaining the servicing rights thereof; (3) primarily investing
in investment securities or mortgage-backed securities with adjustable
interest rates; and (4) attempting to reduce the overall interest rate
sensitivity of liabilities by emphasizing longer-term deposits and
utilizing FHLB advances to replace rate sensitive retail deposits. A
portion of the FHLB advances may be called depending on the level of
interest rates relative to the interest rate being charged at the
applicable call date. Accordingly, if interest rates rise sufficient to
trigger the call feature, the Companys net interest margin may be
negatively impacted if called advances are replaced by new, higher cost
advances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | The matching of assets and liabilities may be analyzed by examining
the extent to which such assets and liabilities are interest rate
sensitive and by monitoring the Companys interest rate sensitivity
gap. An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that
time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time
period. These differences are a primary component of the risk to net
interest income. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Accordingly, during a period of rising interest rates,
an institution with a positive gap position would be in a better position
to 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, 2002, the Companys one-year gap was a positive
12.6% of total assets, compared to a positive 6.8% of total assets at
December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | The Companys interest rate sensitivity is also monitored by
management through the use of a model, which internally generates
estimates of the change in net portfolio value (NPV) over a range of
interest rate change scenarios. NPV is the present value of expected
cash flows from assets, liabilities, and off-balance sheet contracts.
The NPV ratio, under any interest rate scenario, is defined as the NPV in
that scenario divided by the market value of assets in the same scenario.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

28



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






|Item 4. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has established and maintains disclosure controls and
procedures designed to ensure that the information required to be
disclosed in its filings under the Securities and Exchange Act of 1934 is
recorded, processed, summarized, and reported on a timely basis. Within
90 days prior to the filing date of this report, under the supervision
and with the participation of the Companys Chief Executive Officer and
the Chief Financial Officer, the Company has evaluated the effectiveness
of its disclosure controls and procedures. Based on that evaluation, the
CEO and CFO concluded that the Companys disclosure controls and
procedures were effective as of the date of evaluation. There were no
significant changes in the Companys internal controls or in other
factors that could significantly affect those controls subsequent to the
date of the evaluation.




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
|------- |  | -----------------------------------------



| |               
| | --------------
| | Not applicable






|Item 3. |  | Defaults Upon Senior Securities
|------- |  | -------------------------------



| |               
| | --------------
| | Not applicable






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



| |     
| | ----
| | None

29



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|Item 5. |  | Other Information
|------- |  | -----------------



| |     
| | ----
| | None






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



| | (a)  Exhibits
| | -------------

| |      |                                                                                                                                                                                                                                                                             |                                                                                                                        
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------
| | 3.1  |                                                                                                                                                                                                                                                                             | Restated Certificate of Incorporation*                                                                                 
|
| | 3.2  |                                                                                                                                                                                                                                                                             | Amended and Restated Bylaws as of February 23, 2000**                                                                  
|
| | 4.0  |                                                                                                                                                                                                                                                                             | Stock Certificate of BostonFed Bancorp, Inc.*                                                                          
|
| | 99.1 |                                                                                                                                                                                                                                                                             | Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
| | 99.2 |                                                                                                                                                                                                                                                                             | Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
| |      | * Incorporated herein by reference into this document from Exhibits
3.1 and 4.0 to the Form S-1, Registration Statement, and any amendments
thereto, originally filed on July 21, 1995, as amended and declared
effective on September 11, 1995. Registration No. 333-94860
|
| |      | ** Incorporated herein by reference into this document from Exhibit
3.2 to the Annual Report on Form 10-K filed on March 29, 2002.                                                                                                                                         
|

| | (b)  Reports on Form 8-K
| | ------------------------
|

|
|
|
|
|

30



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##### Table of Contents






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, 2002 |  | By: /s/ David F. HollandDavid F. Holland
President and
Chief Executive Officer                              
|                       
|Date: November 14, 2002 |  | By: /s/ John A. SimasJohn A. Simas
Executive Vice President,
Chief Financial Officer
and Corporate Secretary

31



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##### Table of Contents



I, David F. Holland, certify, that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of BostonFed
Bancorp, Inc.;                                                                                                                                                                                                                                               
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, the quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;                  
|  
|4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14 for the registrant and
we have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation
of the internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                            



|6. |  | The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                                                               
|----------------------- |  | ------------------------------------------------------------------------------
|Date: November 14, 2002 |  | By: /s/ David F. HollandDavid F. Holland
President and
Chief Executive Officer

32



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##### Table of Contents



I, John A. Simas, certify, that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of BostonFed
Bancorp, Inc.                                                                                                                                                                                                                                                
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, the quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;                  
|  
|4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14 for the registrant and
we have:                                                                                                     



| | a. |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation
Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or
operation of the internal controls which could adversely
affect the registrants ability to record, process, summarize
and report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                            



|6. |  | The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                                                                           
|----------------------- |  | ------------------------------------------------------------------------------------------
|Date: November 14, 2002 |  | /s/ John A. SimasExecutive Vice President,
Chief Financial Officer
and Corporate Secretary

33