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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
 Form 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period ended March 31, 2004
 OR [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission File Number 1-13936 BOSTONFED BANCORP INC. 
  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 
  Not Applicable 
  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 [  ] The Registrant had 4,527,196 shares of common stock, par value $.01 per
share, outstanding as of April 30, 2004.




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BOSTONFED BANCORP INC.
FORM 10-Q
INDEX PagePart I  FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements (unaudited):Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
(unaudited)
    
    
    4Consolidated
Statements of Income for the Three Months Ended March 31, 2004 and 2003
(unaudited)
    
    
    5Consolidated Statements of Changes in Stockholders Equity for the
Three Months Ended March 31, 2004 (unaudited)
    
    
    6Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003
(unaudited)
    
    
    7Notes to Unaudited Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    23Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    23Item 3. Defaults Upon Senior Securities
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 5. Other Information
    
    
    24Item 6. Exhibits and Reports on Form 8-K
    
    
    24Signatures
    
    
    25Ex-31.1 Certification of CEOEx-31.2 Certification of CFOEx-32.0 Certifications pursuant to Section 1350
 2




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In addition to historical information, this Form 10-Q may contain certain
forward-looking statements, which are based on current management expectations.
Generally, verbs in the future tense and the words believe, expect,
anticipate, intends, opinion, potential and similar expressions
identify forward-looking statements. Examples of this forward-looking
information can be found in, but are not limited to, the expected effects of
accounting pronouncements applicable to the Companys operations, the allowance
for losses discussion, litigation, subsequent events and any quantitative and
qualitative disclosure about market risk. The actual results of BostonFed
Bancorp, Inc. (the Company) could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Companys
loan and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors and the effects of war or terrorist activities affecting the Companys
operations, markets, products, services, prices and litigation. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that
could materially affect the Companys financial results, is included in the
Companys filings with the Securities and Exchange Commission. Except as may be required by applicable law and regulation, the Company
does not undertake, and specifically disclaims any obligation, to publicly
release the result of any revisions, which may be made to any forward-looking
statements, to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events. 3




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Part I. Financial Information 
 Item 1. Consolidated Financial Statements BOSTONFED BANCORP, INC. AND SUBSIDIARIES 
    March 31,
    
    December 31,2004
    
    2003AssetsCash and cash equivalents
    
    $
    50,342
    
    
    $
    34,045Investment securities available for sale (amortized cost of $72,863 at March 31, 2004 and
$101,499 at December 31, 2003)
    
    
    73,658
    
    
    
    102,647Investment securities held to maturity (fair value of $2,212 at March 31, 2004 and $2,137
at December 31, 2003)
    
    
    2,025
    
    
    
    2,025Mortgage-backed securities available for sale (amortized cost of $84,434 at March 31, 2004
and $84,264 at December 31, 2003)
    
    
    84,539
    
    
    
    83,752Mortgage-backed securities held to maturity (fair value of $149,494 at March 31, 2004 and
$145,029 at December 31, 2003)
    
    
    148,898
    
    
    
    145,674Loans held for sale
    
    
    15,806
    
    
    
    12,751Loans, net of allowance for loan losses of $14,346 at March 31, 2004 and $13,874 at
December 31, 2003
    
    
    1,181,184
    
    
    
    1,198,019Accrued interest receivable
    
    
    5,926
    
    
    
    6,129Stock in FHLB of Boston and Federal Reserve Bank
    
    
    28,483
    
    
    
    28,483Bank-owned life insurance
    
    
    25,839
    
    
    
    25,549Premises and equipment, net
    
    
    16,356
    
    
    
    19,539Goodwill/core deposit intangible
    
    
    17,094
    
    
    
    17,536Real estate owned
    
    
    1,777
    
    
    
    1,782Other assets
    
    
    15,939
    
    
    
    17,047Total assets
    
    $
    1,667,866
    
    
    $
    1,694,978Liabilities and Stockholders EquityLiabilities:Deposit accounts
    
    $
    1,178,071
    
    
    $
    1,190,755Federal Home Loan Bank advances and other Borrowings
    
    
    386,962
    
    
    
    398,653Advance payments by borrowers for taxes and insurance
    
    
    2,944
    
    
    
    2,819Other liabilities
    
    
    4,282
    
    
    
    8,102Total liabilities
    
    
    1,572,259
    
    
    
    1,600,329Commitments and contingenciesStockholders 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 (4,526,896 and 4,491,796 shares outstanding at March 31,
2004 and December 31, 2003, respectively)
    
    
    66
    
    
    
    66Additional paid-in capital
    
    
    70,201
    
    
    
    70,141Retained earnings
    
    
    64,768
    
    
    
    64,684Accumulated other comprehensive income
    
    
    549
    
    
    
    395Less: Treasury stock, at cost (2,062,721 shares and 2,097,821 shares at
March 31, 2004 and December 31, 2003, respectively)
    
    
    (39,977
    )
    
    
    (40,637
    )Total stockholders equity
    
    
    95,607
    
    
    
    94,649Total liabilities and stockholders equity
    
    $
    1,667,866
    
    
    $
    1,694,978
 See accompanying condensed notes to unaudited consolidated financial statements. 4




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BOSTONFED BANCORP, INC. AND SUBSIDIARIES 
    Three Months Ended3/31/2004
    
    3/31/2003Interest income:Loans
    
    $
    15,796
    
    
    $
    16,579Mortgage-backed securities
    
    
    2,472
    
    
    
    1,537Investment securities
    
    
    739
    
    
    
    1,138Total interest income
    
    
    19,007
    
    
    
    19,254Interest expense:Deposit accounts
    
    
    5,184
    
    
    
    5,079Borrowed funds
    
    
    4,421
    
    
    
    5,323Total interest expense
    
    
    9,605
    
    
    
    10,402Net interest income
    
    
    9,402
    
    
    
    8,852Provision for loan losses
    
    
    450
    
    
    
    450Net interest income after provision for loan losses
    
    
    8,952
    
    
    
    8,402Non-interest income:Deposit service fees
    
    
    838
    
    
    
    856Loan processing and servicing fees
    
    
    (1,046
    )
    
    
    (858
    )Gain on sale of loans
    
    
    1,887
    
    
    
    3,170Income from bank-owned life insurance
    
    
    290
    
    
    
    319Gain on sale of investments
    
    
    496
    
    
    
    Other
    
    
    420
    
    
    
    370Total non-interest income
    
    
    2,885
    
    
    
    3,857Non-interest expense:Compensation and benefits
    
    
    6,211
    
    
    
    6,133Occupancy and equipment
    
    
    1,290
    
    
    
    1,258Data processing
    
    
    646
    
    
    
    506Advertising expense
    
    
    361
    
    
    
    299Stationary, printing and office supplies
    
    
    212
    
    
    
    240Federal deposit insurance premiums
    
    
    51
    
    
    
    48Amortization of core deposit intangible
    
    
    312
    
    
    
    Other
    
    
    1,585
    
    
    
    1,447Total non-interest expense
    
    
    10,668
    
    
    
    9,931Income before income taxes
    
    
    1,169
    
    
    
    2,328Income tax expense
    
    
    365
    
    
    
    3,926Net income (loss)
    
    $
    804
    
    
    $
    (1,598
    )Basic earnings (loss) per share
    
    $
    0.18
    
    
    $
    (0.36
    )Diluted earnings (loss) per share
    
    $
    0.17
    
    
    $
    (0.36
    )Basic weighted average shares outstanding
    
    
    4,507,853
    
    
    
    4,394,752Common stock equivalents due to dilutive effect of stock options
    
    
    235,395
    
    
    
    239,294Diluted total weighted average shares outstanding
    
    
    4,743,248
    
    
    
    4,634,046
 See accompanying condensed notes to unaudited consolidated financial statements. 5




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BOSTONFED BANCORP, INC. AND SUBSIDIARIES 
     AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    other
    
    TotalCommon
    
    paid-in
    
    Retained
    
    Treasury
    
    comprehensive
    
    stockholdersStock
    
    capital
    
    earnings
    
    stock
    
    income
    
    equityBalance at December 31, 2003
    
    $
    66
    
    
    $
    70,141
    
    
    $
    64,684
    
    
    $
    (40,637
    )
    
    $
    395
    
    
    $
    94,649Net income
    
    
    
    
    
    
    
    
    
    
    804
    
    
    
    
    
    
    
    
    
    
    
    804Change in net unrealized
gain on investments
available for sale (net of
tax of $98)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154
    
    
    
    154Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    958Cash dividends declared and
paid ($0.16 per share)
    
    
    
    
    
    
    
    
    
    
    (720
    )
    
    
    
    
    
    
    
    
    
    
    (720
    )Stock options exercised,
net of taxes
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    660
    
    
    
    
    
    
    
    714Fair value of shares
charged to expense for
compensation plans
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Balance at March 31, 2004
    
    $
    66
    
    
    $
    70,201
    
    
    $
    64,768
    
    
    $
    (39,977
    )
    
    $
    549
    
    
    $
    95,607
 See accompanying condensed notes to unaudited consolidated financial statements. 6




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BOSTONFED BANCORP, INC. AND SUBSIDIARIES 
    For the Three Months EndedMarch 31,2004
    
    2003Net cash flows from operating activities:Net Income (loss)
    
    $
    804
    
    
    $
    (1,598
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation, amortization and accretion, net
    
    
    1,072
    
    
    
    523Earned SIP shares
    
    
    
    
    
    
    6Appreciation in fair value of shares charged to expense for
compensation plans
    
    
    6
    
    
    
    138Income from bank-owned life insurance
    
    
    (290
    )
    
    
    (319
    )Provision for loan losses
    
    
    450
    
    
    
    450Provision for valuation for real estate owned
    
    
    6
    
    
    
    Loans originated for sale
    
    
    (106,354
    )
    
    
    (200,116
    )Proceeds from sale of loans
    
    
    105,186
    
    
    
    211,999Gain on sale of investment securities
    
    
    (496
    )
    
    
    Gain on sale of loans
    
    
    (1,887
    )
    
    
    (3,170
    )Decrease in accrued interest receivable
    
    
    203
    
    
    
    185Decrease in prepaid expenses and other assets, net
    
    
    999
    
    
    
    224Decrease in accrued expenses and other liabilities, net
    
    
    (3,820
    )
    
    
    (1,057
    )Net cash (used in) provided by operating activities
    
    
    (4,121
    )
    
    
    7,265Cash flows from investing activities:Proceeds from sale of investment securities available for sale
    
    
    22,013
    
    
    
    Proceeds from maturities of investments securities available for sale
    
    
    6,478
    
    
    
    1,000Purchase of investment securities available for sale
    
    
    
    
    
    
    (7,710
    )Purchase of mortgage-backed securities available for sale
    
    
    (12,138
    )
    
    
    (39,252
    )Purchase of mortgage-backed securities held to maturity
    
    
    (8,107
    )
    
    
    Principal payments on mortgage-backed securities available for sale
    
    
    11,746
    
    
    
    33,535Principal payments on mortgage-backed securities held to maturity
    
    
    4,866
    
    
    
    4,241Principal payments on investment securities available for sale
    
    
    584
    
    
    
    1,076Decrease in loans, net
    
    
    16,385
    
    
    
    33,021Proceeds from sale of premises
    
    
    3,562
    
    
    
    Purchases of premises and equipment
    
    
    (714
    )
    
    
    (208
    )Additional investment in real estate owned
    
    
    (1
    )
    
    
    (18
    )Net cash provided by investing activities
    
    $
    44,674
    
    
    $
    25,685
 -Continued on next page- 7




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BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Concluded)
(In thousands)
(Unaudited) For the Three Months EndedMarch 31,2004
    
    2003Cash flows from financing activities:Increase (decrease) in deposit accounts
    
    
    (12,684
    )
    
    
    448Repayments of Federal Home Loan Bank advances
    
    
    (96,165
    )
    
    
    (53,130
    )Proceeds from Federal Home Loan Bank advances
    
    
    84,474
    
    
    
    22,014Cash dividends paid
    
    
    (720
    )
    
    
    (708
    )Common stock repurchased
    
    
    
    
    
    
    (610
    )Options exercised, net of taxes
    
    
    714
    
    
    
    267Increase in advance payments by borrowers for taxes and insurance
    
    
    125
    
    
    
    234Net cash used in financing activities
    
    
    (24,256
    )
    
    
    (31,485
    )Net increase in cash and cash equivalents
    
    
    16,297
    
    
    
    1,465Cash and cash equivalents at beginning of period
    
    
    34,045
    
    
    
    74,672Cash and cash equivalents at end of period
    
    $
    50,342
    
    
    $
    76,137Supplemental disclosure of cash flow information: Payments during the period for:Interest
    
    $
    11,001
    
    
    $
    10,315Taxes
    
    $
    63
    
    
    $
    1,248
 See accompanying condensed notes to unaudited consolidated financial statements. 8




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BOSTONFED BANCORP INC. AND SUBSIDIARIES 
   NOTE 1: BASIS OF PRESENTATION The unaudited consolidated financial statements as of March 31, 2004 and
for the three-month periods ended March 31, 2004 and 2003 of the Company and
its wholly-owned subsidiary, Boston Federal Savings Bank (BFS or the Bank).
The Company also owns 100% of the common stock of BFD Preferred Capital Trust I
and BFD Preferred Capital Trust II (the Trusts), each of which have issued
trust preferred securities to the public. As of December 31, 2003, the Trusts
were no longer included in the companys consolidated financial statements.
(See FIN No. 46R discussion in Note 4 to the condensed notes to the unaudited
consolidated financial statements). The unaudited consolidated financial
statements 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, 2003. A former subsidiary of the Company, Broadway National Bank,
was merged into BFS on December 31, 2003. The unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all necessary adjustments, consisting only of normal
recurring accruals necessary for a fair presentation, have been included. In
preparing the consolidated financial statements, the Company was required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities for the unaudited consolidated balance sheets as of March 31, 2004
and December 31, 2003, and amounts of revenues and expenses in the unaudited
consolidated statements of income for the three months ended March 31, 2004
and 2003. All significant inter-company accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
period amounts to conform to the current period presentation. The results of
operations for the three-month periods ended March 31, 2004 and 2003 are not
necessarily indicative of the results that may be expected for the entire
fiscal year. NOTE 2: EMPLOYEE STOCK OPTION BENEFITS The Company measures compensation cost for stock-based compensation plans
using the intrinsic value based method of accounting. Intrinsic value is
measured as the difference between the exercise price of options granted and
the fair market value of the Companys stock at the grant date. No stock
option-based employee compensation cost is reflected in net income (loss), as
all options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. Had the Company determined compensation expense consistent with the fair
value approach, the Companys net income (loss) and earnings (loss) per share
would have been reduced to the pro forma amounts indicated below for the
three-month periods ended March 31: Three months endedMarch 31,2004
    
    2003Net income (loss) as reported
    
    $
    804
    
    
    
    (1,598
    )Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effect
    
    
    (22
    )
    
    
    (24
    )Pro forma net income (loss)
    
    
    782
    
    
    
    (1,622
    )Basic earnings (loss) per share as reported
    
    
    0.18
    
    
    
    (0.36
    )Diluted earnings (loss) per share as reported
    
    
    0.17
    
    
    
    (0.36
    )Pro forma basic earnings (loss) per share
    
    
    0.17
    
    
    
    (0.37
    )Pro forma diluted earnings (loss) per share
    
    
    0.16
    
    
    
    (0.37
    )
 The Company uses the Black-Scholes option pricing model to determine the
per share weighted average fair value of stock options granted. There were
5,000 stock options granted during the three months ended March 31, 2004 with
an average fair value of approximately $10.00 per share, using approximate
expected dividend yield, risk-free interest rate, expected volatility and
expected life of 2.00%, 3.50%, 30.00% and 6 years, respectively. There were no
stock options granted during the three months ended March 31, 2003. 9




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NOTE 3: COMMITMENTS, CONTINGENCIES AND CONTRACTS At March 31, 2004, the Company had commitments of $97.1 million to
originate mortgage loans and $1.5 million to purchase loans from correspondent
lenders. Of these $98.6 million commitments, $82.2 million were adjustable rate
mortgage loans with interest rates ranging from 3.38% to 7.00% and $16.4
million were fixed rate mortgage loans with interest rates ranging from 3.88%
to 7.50%. The Company also had commitments to sell $50.5 million of mortgage
loans. At March 31, 2004, the Company was servicing first mortgage loans of
approximately $981.6 million, which are either partially or wholly-owned by
others. NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS FASB issued Interpretation (FIN) No. 46, Consolidation of Variable
Interest Entities  an Interpretation of Accounting Research Bulletin No. 51.
FIN No. 46 establishes accounting guidance for consolidation of variable
interest entities (VIE) that function to support the activities of the
primary beneficiary. The primary beneficiary of a VIE entity is the entity that
absorbs a majority of the VIEs expected losses, receives a majority of the
VIEs expected residual returns, or both, as a result of ownership, controlling
interest, contractual relationship or other business relationship with a VIE.
Prior to the implementation of FIN 46, VIEs were generally consolidated by an
enterprise when the enterprise had a controlling financial interest through
ownership of a majority of voting interest in the entity. The Company adopted
FIN No. 46 as of February 1, 2003 for all arrangements entered into after
January 31, 2003. In December 2003, the FASB issued a revised FIN No. 46, FIN 46R, which in
part specifically addresses limited purpose trusts formed to issue trust
preferred securities. The guidance required the Company to deconsolidate its
investment in BFD Preferred Capital Trust I and II by March 31, 2004, but the
Company chose to early adopt as of December 31, 2003. The result of
deconsolidating these Trusts is that the trust preferred securities of the
Trusts no longer appear on the consolidated balance sheet of the Company. Due
to FIN No. 46R, the junior subordinated debentures of the Company that were
previously eliminated in consolidation are included on the consolidated balance
sheet with total borrowings. For all other arrangements entered into subsequent
to January 31, 2003, the Company adopted FIN No. 46R as of December 31, 2003.
The adoption of this interpretation did not have a material impact on the
Companys financial position or results of operations. In December 2003, the American Institute of Certified Public Accountants
(AICPA) issued SOP 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer. SOP 03-3 requires loans acquired through a transfer,
such as a business combination, where there are differences in expected cash
flows and contractual cash flows due in part to credit quality being recognized
at its fair value. The excess of contractual cash flows over expected cash
flows is not to be recognized as an adjustment of yield, loss accrual or
valuation allowance. Valuation allowances can neither be created nor carried
over in the initial accounting for loans acquired in a transfer
on loans. This SOP is effective for loans acquired after
December 15, 2004, with early
adoption encouraged. The Company does not believe the adoption of SOP 03-3
will have a material impact on the Companys financial position or results of
operations. NOTE 5: ACQUISITION OF BRANCHES AND MERGER OF BROADWAY NATIONAL BANK On October 24, 2003, the Company acquired the seven (7) Boston area branch
offices of Encore Bank. The former Lexington office of Encore Bank was merged
into the Companys existing Lexington office. The acquisition was accounted
for as a purchase and accordingly was included in the results of operations
from the date of acquisition. The following table summarizes the estimated
fair value of the assets acquired and liabilities assumed at the date of
acquisition. The Company has adjusted and expects further adjustments of the
estimated fair values assigned to the assets acquired and liabilities assumed
during 2004, although such adjustments have not and are not expected to be
significant, nor impact earnings. It is expected that the deposit premium paid
will be deductible for income tax purposes. Assets acquired:Cash
    
    $
    251Premises and equipment
    
    
    7,327Core deposit intangible
    
    
    5,000
 10




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Other assets
    
    
    47Total assets acquired
    
    
    12,625Liabilities Assumed:Deposit accounts
    
    
    321,948Discount on certificates of deposit
    
    
    2,500Accrued expenses and other liabilities
    
    
    442Total liabilities assumed (net of assets acquired)
    
    
    312,265Cash received from Encore Bank
    
    
    310,297Goodwill
    
    
    1,968
 In February 1997, the Company acquired Broadway National Bank and operated
it as a subsidiary of the Company, consolidating its results with the Company
and its other subsidiaries. Effective December 31, 2003, Broadway National
Bank was merged into Boston Federal Savings Bank. The merger was executed in
order to improve efficiencies. The effects of this merger are not material to
the Companys consolidated financial statements. 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A. GENERAL The Company, headquartered in Burlington, Massachusetts, was organized in
1995 under Delaware law as the holding company for BFS, in connection with the
conversion of BFS from a mutual to a stock form of ownership. The Company later
acquired BNB, a nationally-chartered commercial bank, as its wholly-owned
subsidiary, which was merged into BFS on December 31, 2003, collectively, BFS.
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 and Ellsmere operate as subsidiaries of
BFS. On October 24, 2003, the Company acquired the seven (7) Boston area branch
offices of Encore Bank (the acquisition of branches). The acquired Lexington
office was merged into the Companys existing Lexington office. The Companys business has been conducted primarily through its
wholly-owned subsidiary, BFS. It operates its administrative/bank branch office
located in Burlington, Massachusetts and its 16 other bank branch offices
located in Arlington, Bedford, Belmont, Billerica, Boston, Chelsea, Lexington,
Needham, Newton, Peabody, Revere, Sudbury and two offices each in Wellesley and
Woburn. These offices are all located in the greater Boston metropolitan area.
The Linden Street Wellesley office will be merged into the Rt. 9 Wellesley
office in June 2004. The Banks subsidiary, Forward Financial, maintains its
headquarters in Westborough, Massachusetts, effective October 1, 2003,
(previously Northborough, MA) and operates in approximately 20 states. Through
its subsidiary bank, the Company attracts retail deposits from the general
public and invests those deposits and other borrowed funds in loans,
mortgage-backed securities, U.S. Government and federal agency securities and
other securities. The Company originates mortgage loans for its investment
portfolio and for sale and generally retains the servicing rights of loans it
sells. Additionally, the Company originates chattel mortgage loans on
manufactured housing, recreational vehicles and boats and first mortgage loans
on manufactured housing and stick-built housing, 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. 11




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##### Table of Contents



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 and borrowings. 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. Effective December 31, 2003, the Company is a savings and loan holding
company subject to the regulations of the Office of Thrift Supervision (the
OTS). Executive Summary BostonFed is a $1.7 billion, community-oriented, savings and loan holding
company offering a variety of financial services through its principal
subsidiary, BFS. Both the Company and the Bank are headquartered in
Burlington, Massachusetts and are regulated y the OTS. The Company attracts
retail deposits from the general public through its seventeen branch offices in
fifteen cities/towns in the Boston metropolitan area. The Company originates
residential and commercial real estate mortgage loans for portfolio and for
sale, business and consumer loans, primarily in its lending area of Eastern
Massachusetts. Through Forward Financial Company, a subsidiary of the Bank,
the Company also originates loans, generally for sale, on manufactured housing,
recreational vehicles and boats, currently in 20 states.  Net income for the quarter ended March 31, 2004 was $804,000, compared to a
net loss of $1.6 million for the quarter ended March 31, 2003. Basic and
diluted earnings per share were $0.18 and $0.17, respectively for the
quarter ended March 31, 2004. Basic and diluted loss per share was $0.36
for the first quarter of 2003.The net interest margin of 2.42% for the quarter ended March 31, 2004 was 16
basis points lower than the 2.58% net interest margin for the first quarter
of 2003. This reduction partially offset the benefit of increased earnings
from larger average balances of interest-earning assets.Generally higher mortgage interest rates caused a decline in mortgage loan
originations and consequently lead to a $1.3 million decline in gain on sale
of loans in the first quarter of 2004 when compared to the first quarter of
2003.At the end of the first quarter of 2004, however, interest rates declined,
which impacted prepayment speed assumptions in valuing the Companys
originated mortgage servicing rights, (OMSRs) necessitating a valuation
adjustment of approximately $900,000.The first quarter of 2003 was significantly impacted by a $4.6 million
provision for additional state taxes and interest relating to the disputed
deduction for dividends received from real estate investment trust
subsidiaries, for the 1999 through 2002 fiscal years. The dispute resulting
from this retroactive change in the state tax law was subsequently resolved
in the second quarter of 2003, allowing for a recovery of approximately
one-half the provision.Non-performing loans increased from $4.7 million at December 31, 2003 to
$7.9 million at March 31, 2004, due to two residential sub-division
construction loans and a loan secured by an industrial building becoming
delinquent 90 days or more. The allowance for loan losses as a percent of
loans increased from 1.13% at December 31, 2003 to 1.18% at March 31, 2004. Critical Accounting Policies The Companys critical accounting policies were detailed in the Companys
Annual Report for the year ended December 31, 2003, in the Managements
Discussion and Analysis of Financial Condition and Results of Operations and in
Note 1 of the Consolidated Financial Statements. Various elements of the
Companys accounting policies, by their nature, are inherently subject to
estimation techniques, valuation assumptions and other subjective assessments.
The Companys policies with respect to the methodologies used 12




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##### Table of Contents



to determine the allowance for loan losses and asset impairment judgments,
including the valuation of Originated Mortgage Servicing Rights (OMSRs) and
the value of goodwill, are the Companys most critical accounting policies
because they are important to the presentation of the financial condition and
results of operations of the Company and they involve a higher degree of
complexity and require management to make difficult and subjective judgments,
which often require assumption or estimates about highly uncertain matters. The
use of different judgments, assumptions and estimates could result in material
differences in the results of operations or financial condition. The
appropriate, critical accounting policies and their application are reviewed
quarterly by the Audit and Compliance Committee of the Board of Directors. B. FINANCIAL CONDITION Assets Total assets declined by $27.1 million to a balance of $1.7 billion at
March 31, 2004, compared to December 31, 2003. Cash and cash equivalents
increased by $16.3 million, which was more than offset by declines of $29.0
million and $16.8 million in investment securities available for sale and
loans, net, respectively. Cash and cash equivalents increased due to larger
balances of FHLB overnight deposits. Investment securities available for sale
declined from a balance of $102.6 million at December 31, 2003 to $73.7 million
at March 31, 2004 due primarily to the sale of portions of the Companys
adjustable-rate mortgage mutual funds, short-term mutual funds and equity
securities portfolio. The proceeds were temporarily invested in FHLB overnight
deposits. Loans, net of allowance for loan losses, declined by $16.8 million to $1.2
billion at March 31, 2004, compared to December 31, 2003 as prepayments and
amortization exceeded new production earmarked for portfolio. 13




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##### Table of Contents



The Companys loan portfolio was comprised of the following at: 3/31/04
    
    12/31/03In thousands(Unaudited)Mortgage loans:Residential 1-4 family
    
    $
    832,852
    
    
    $
    827,184Multi-family
    
    
    20,053
    
    
    
    20,044Construction and land
    
    
    98,847
    
    
    
    116,427Commercial real estate
    
    
    110,566
    
    
    
    123,544Total mortgage loans
    
    
    1,062,318
    
    
    
    1,087,199Consumer and other loans:Home equity and improvement
    
    
    126,177
    
    
    
    120,205Consumer
    
    
    3,514
    
    
    
    4,597Business
    
    
    26,110
    
    
    
    26,582Total consumer and other loans
    
    
    155,801
    
    
    
    151,384Total loans, gross
    
    
    1,218,119
    
    
    
    1,238,583Allowance for loan losses
    
    
    (14,346
    )
    
    
    (13,874
    )Construction loans in process
    
    
    (29,447
    )
    
    
    (33,125
    )Net unearned premium on loans purchased
    
    
    22
    
    
    
    25Deferred loan origination costs
    
    
    6,836
    
    
    
    6,448Loans, net
    
    $
    1,181,184
    
    
    $
    1,198,019
 As noted in the above table, the allowance for loan losses amounted to
$14.3 million at March 31, 2004. Management believes the allowance is adequate
to absorb probable loan losses. The allowance for loan losses increased from
$13.9 million at December 31, 2003 due to the current quarters provision, net
of charge-offs/recoveries. Because future events affecting the loan portfolio
cannot be predicted with complete accuracy, there can be no assurances that
managements estimates are correct and that the existing allowance for loan
losses is adequate. However, 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 three months
ended March 31, 2004: In thousandsBalance at December 31, 2003
    
    $
    13,874Loss provision
    
    
    450Recoveries
    
    
    45Charge-offs
    
    
    (23
    )Balance at March 31, 2004
    
    $
    14,346
 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, the OTS, as an integral part of its examination process,
periodically reviews the Companys allowance based on its judgments about
information available to it at the time of its examination. While management
uses information currently available to estimate inherent losses on its loans,
future additions to the allowance may be necessary based on regulatory
directives or future events, including changes in local, regional and national
economic conditions, changes in the 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. 14




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##### Table of Contents



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). The Committee classifies
loans depending on risk of loss characteristics. The most severe classification
before a charge-off or impairment is required is sub-standard. At March 31,
2004, the Company classified $24.2 million of loans as sub-standard compared to
$21.2 million at December 31, 2003. A substantial majority of the increase in
sub-standard loans was due to three loans (two residential sub-division
construction loans and one condominium loan) being classified as sub-standard
during the quarter ended March 31, 2004. Non-performing assets at March 31,
2004 totaled $9.6 million or 0.58% of total assets, compared to $6.5 million,
or 0.38% of total assets, at December 31, 2003. The increase was due to the two
residential sub-division construction loans mentioned above and a loan secured
by an industrial building becoming delinquent 90 days or more during the
quarter. The Committee, which meets quarterly, determines
the adequacy of the allowance for loan losses through ongoing analysis of
historical loss experience, the composition of the loan portfolios, delinquency
levels, underlying collateral values, cash flow values and state of the real
estate economy. Management believes that the allowance for loan losses at March
31, 2004 was sufficient to provide for anticipated losses inherent in the loan
portfolio. The Companys $14.3 million allowance for loan losses at March 31, 2004
represented 183% of non-performing loans or 1.18% of total loans, compared to
$13.9 million at December 31, 2003, or 296% of non-performing loans and 1.13%
of total loans. Management believes these coverage ratios are at prudent levels
considering the levels of non-performing loans and classified loans. Non-performing loans were $7.9 million at March 31, 2004. 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 $140,000 and
$129,000 for the three-month periods ended March 31, 2004 and 2003,
respectively. The amount of interest income that was recorded on these loans
was $1,000 and $21,000 for the three-month periods ended March 31, 2004 and
2003, respectively. At March 31, 2004, there were four loans with a net balance of $3.7
million, characterized as impaired. During the three months ended March 31,
2004, the average recorded value of impaired loans was $3.7 million, there was
$12,000 of interest income that was recognized and $87,000 of interest income
that would have been recognized under the loans original terms. At March 31,
2003, there were seven loans with a net balance of $10.8 million, characterized
as impaired. During the three months ended March 31, 2003, the average
recorded value of impaired loans was $6.4 million, there was $29,000 of
interest income that was recognized and $123,000 of interest income that would
have been recognized under the loans original terms. At March 31, 2004 and December 31, 2003, the Company had one property in
real estate owned (REO), with a balance of $1.8 million. The REO was
comprised of a commercial real estate property, acquired through a deed in lieu
of foreclosure, in Woburn, Massachusetts. The Company is currently marketing
the property for sale. Premises and equipment, net, declined by $3.2 million during the first
quarter of 2004 as the Company sold one of the buildings acquired as part of
the acquisition of the Encore Bank branches. Liabilities Deposit accounts were $1.2 billion at March 31, 2004, a decrease of $12.7
million from the December 31, 2003 total. Most of this decrease was due to
wholesale-brokered certificates of deposit, which are included in deposit
accounts, declining to $108.0 million at March 31, 2004 from the $117.8 million
at December 31, 2003. 15




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##### Table of Contents



The following is a summary of deposit balances by type at: 03/31/04
    
    12/31/03In thousands(Unaudited)NOW accounts
    
    $
    206,304
    
    
    $
    211,469Regular and statement savings
    
    
    220,476
    
    
    
    227,491Money market
    
    
    126,595
    
    
    
    138,986Demand deposits and official checks
    
    
    97,081
    
    
    
    91,695Total non-certificate accounts
    
    
    650,456
    
    
    
    669,641Certificate accounts:3 to 12 months
    
    
    81,662
    
    
    
    57,2711 to 3 years
    
    
    299,113
    
    
    
    320,818Greater than 3 years
    
    
    91,901
    
    
    
    91,702IRA/KEOGH
    
    
    54,939
    
    
    
    51,323Total certificate accounts
    
    
    527,615
    
    
    
    521,114Total deposit balances
    
    
    1,178,071
    
    
    
    1,190,755Expected maturity of certificate accounts:Within one year
    
    
    268,125
    
    
    
    255,666One to two years
    
    
    176,090
    
    
    
    174,903Two to three years
    
    
    46,830
    
    
    
    47,358Over three years
    
    
    36,570
    
    
    
    43,187Total expected maturity
    
    $
    527,615
    
    
    $
    521,114
 FHLB advances and other borrowings declined $11.7 million, to a balance of
$387.0 million at March 31, 2004, from $398.7 million at December 31, 2003. C. COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 GENERAL During the quarter ended March 31, 2004, the Company earned $804,000, or
$0.18 basic and $0.17 diluted earnings per share, compared to a net loss of
$1.6 million or $0.36 basic and diluted loss per share for the first quarter of
2003. The 2004 first quarters earnings were negatively impacted primarily by a
reduction in gain on sale of loans and a valuation adjustment to the originated
mortgage servicing rights (OMSRs), whereas the prior years first quarter
loss was driven by a $4.6 million provision for additional state taxes and
interest relating to the disputed deduction for dividends received from real
estate investment trust (REIT) subsidiaries, for the 1999 through 2002 fiscal
years. The dispute resulting from this retroactive change in the state tax law
was subsequently resolved in the second quarter of 2003, allowing for a
recovery of approximately one-half the provision. For the three months ended March 31, 2004 and 2003, the annualized return
(loss) on average stockholders equity was 3.30% and (6.75%), respectively.
Comments regarding the components of net income are detailed in the following
paragraphs. Average Balances, Yields and Costs The following table sets forth certain information relating to the Company
for the three months ended March 31, 2004 and 2003. The average yields and
costs are derived by dividing income or expense by the average balance of
interest earning assets or interest bearing liabilities, respectively, for the
periods shown. The average balance data is derived from daily balances. The
yields and costs include fees, premiums and discounts, which are considered
adjustments to yields. 16




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##### Table of Contents



BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yield/Costs
(Unaudited) 2004
    
    2003Average
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    Cost(Dollars in thousands)For the three months ended March 31:Assets:Interest-earning assets:Investment securities (1)
    
    $
    130,033
    
    
    $
    739
    
    
    
    2.27
    %
    
    $
    163,546
    
    
    $
    1,138
    
    
    
    2.78
    %Loans, net and loans held for sale (2)
    
    
    1,193,601
    
    
    
    15,796
    
    
    
    5.29
    %
    
    
    1,083,962
    
    
    
    16,579
    
    
    
    6.12
    %Mortgage-backed securities (3)
    
    
    231,338
    
    
    
    2,472
    
    
    
    4.27
    %
    
    
    127,126
    
    
    
    1,537
    
    
    
    4.84
    %Total interest-earning assets
    
    
    1,554,972
    
    
    
    19,007
    
    
    
    4.89
    %
    
    
    1,374,634
    
    
    
    19,254
    
    
    
    5.60
    %Non interest-earning assets
    
    
    109,949
    
    
    
    
    
    
    
    
    
    
    
    109,339Total assets
    
    
    1,664,921
    
    
    
    
    
    
    
    
    
    
    
    1,483,973Liabilities and stockholders equity:Interest-bearing liabilities:Money market deposit accounts
    
    
    131,829
    
    
    
    510
    
    
    
    1.55
    %
    
    
    62,777
    
    
    
    186
    
    
    
    1.19
    %Savings accounts
    
    
    224,848
    
    
    
    505
    
    
    
    0.90
    %
    
    
    216,271
    
    
    
    616
    
    
    
    1.14
    %NOW accounts
    
    
    202,610
    
    
    
    309
    
    
    
    0.61
    %
    
    
    143,301
    
    
    
    95
    
    
    
    0.27
    %Certificate accounts
    
    
    522,543
    
    
    
    3,860
    
    
    
    2.95
    %
    
    
    421,002
    
    
    
    4,182
    
    
    
    3.97Total
    
    
    1,081,830
    
    
    
    5,184
    
    
    
    1.92
    %
    
    
    843,351
    
    
    
    5,079
    
    
    
    2.41
    %Borrowed funds (4)
    
    
    394,712
    
    
    
    4,421
    
    
    
    4.48
    %
    
    
    438,722
    
    
    
    5,323
    
    
    
    4.85
    %Total interest-bearing liabilities
    
    
    1,476,542
    
    
    
    9,605
    
    
    
    2.60
    %
    
    
    1,282,073
    
    
    
    10,402
    
    
    
    3.25
    %Non interest-bearing liabilities
    
    
    91,038
    
    
    
    
    
    
    
    
    
    
    
    107,188Total liabilities
    
    
    1,567,580
    
    
    
    
    
    
    
    
    
    
    
    1,389,261Stockholders equity
    
    
    97,341
    
    
    
    
    
    
    
    
    
    
    
    94,712Total liabilities and
stockholders equity
    
    $
    1,664,921
    
    
    
    
    
    
    
    
    
    
    $
    1,483,973Net interest rate spread (5)
    
    
    
    
    
    $
    9,402
    
    
    
    2.29
    %
    
    
    
    
    
    $
    8,852
    
    
    
    2.35
    %Net interest margin (6)
    
    
    
    
    
    
    
    
    
    
    2.42
    %
    
    
    
    
    
    
    
    
    
    
    2.58
    %Ratio of interest-earning assets to interest-bearing
liabilities
    
    
    105.31
    %
    
    
    
    
    
    
    
    
    
    
    107.22
    %
 (1) Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold. (2) Amount is net of deferred loan origination costs, construction loans in
process, net unearned discount on loans purchased and allowance for loan losses
and includes non-performing loans. (3) Includes mortgage-backed securities available for sale and held to
maturity. (4) Interest paid on borrowed funds for the periods presented includes
interest expense on loan investor deposits held in escrow accounts with the
Company related to the Companys loan servicing, which, if such interest
expense was excluded, would result in an average cost of borrowed funds of
4.47% for the three months ended March 31, 2004 and no change for the three
months ended March 31, 2003. (5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities. (6) Net interest margin represents net interest income as a percentage of
average interest earning assets. Interest Income 17




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##### Table of Contents



Total interest income on interest-earning assets for the quarter ended
March 31, 2004 declined by $247,000, or 1.3%, to $19.0 million, compared to the
quarter ended March 31, 2003. The decrease in interest income was due to a 71
basis point decline in the average yield on interest earning assets, partially
offset by the earnings on the $180.3 million increase in average
interest-earning assets. The average yield on interest-earning assets declined
to 4.89% for the three months ended March 31, 2004 from 5.60% for the three
months ended March 31, 2003. The reduced yields are due in part to the
repricing of a portion of the Companys adjustable-rate portfolio, based on
much lower indices resulting from the Federal Reserve induced decline in market
interest rates during the past few years. Additionally, the proceeds received
from the record levels of loan prepayments and matured investment securities
have been re-invested at much lower interest rates due to the decline in market
interest rates. Interest income on loans, net, for the quarter ended March 31, 2004
declined by $783,000, or 4.7%, to $15.8 million compared to $16.6 million for
the comparable quarter in 2003. The decrease in interest income from loans,
net, for the current three-month period was due to the 83 basis point decline
in the average yield, partially offset by the $109.6 million increase in the
average balance of loans, net. The average yield on loans, net for the three
months ended March 31, 2004 was 5.29%, compared to an average yield of 6.12%
for the three months ended March 31, 2003. Many adjustable-rate loans continue
to be originated at relatively low interest rates and the major repricing
indices remain at near historic lows. The Company has continued investing in
interest sensitive loans such as equity lines, commercial and construction,
business and other short-term indexed loans and selling most of its fixed-rate
longer term loans into the secondary market in order to better protect against
the possibility of rising interest rates. Interest on mortgage-backed securities for the quarter ended March 31,
2004 was $2.5 million, compared to $1.5 million for the quarter ended March 31,
2003. The increase in interest on mortgage-backed securities was due to a
$104.2 million increase in the average balance, partially offset by the effects
of a 57 basis point decline in the average yield. The average yield declined
from 4.84% for the three months ended March 31, 2003, to 4.27% for the current
three-month period. The reduction in yield is a reflection of the low interest
rate environment, which results in the reinvestment of amortization and
prepayments into lower yielding similar investments. Income from investment securities was $739,000 for the three months ended
March 31, 2004, compared to $1.1 million for the prior year quarter. The
decline in income from investment securities was due to the combined effects of
lower average balance of investment securities in the current year quarter and
a reduction in the average yield. The average balance of investment securities
declined to $130.0 million for the three months ended March 31, 2004, from an
average balance of $163.5 million for the prior year quarter. The average yield
declined from 2.78% for the three months ended March 31, 2003, to 2.27% for the
2004 first quarter. The reduction in yield on investment securities is also
reflective of the declines in market interest rates, including the historically
low rates being paid on federal funds and Federal Home Loan Bank overnight
deposits. Because the Companys investment securities are generally of a
shorter-term nature, the decline in market interest rates has had a significant
impact on the overall yield of investment securities. 18




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##### Table of Contents



Interest Expense Total interest expense on interest-bearing liabilities for the quarter
ended March 31, 2004 declined by $797,000, or 7.7%, to $9.6 million compared to
$10.4 million for the quarter ended March 31, 2003. The decrease in interest
expense for the first quarter of 2004 was due to a 65 basis point reduction in
the average cost of interest bearing liabilities, which was partially offset by
the interest expense applicable to a $194.5 million increase in the average
balance of interest-bearing liabilities, which averaged $1.5 billion during the
first quarter of 2004, compared to an average balance of $1.3 billion during
the quarter ended March 31, 2003. The average cost of interest-bearing
liabilities declined to 2.60% during the quarter ended March 31, 2004, compared
to 3.25% for last years first quarter. The Companys cost of interest bearing
liabilities has declined more slowly than yields on interest earning assets as
competitive market conditions, the already low interest rates being paid on
deposits and longer term FHLB advances have precluded more rapid declines in
the interest paid on these interest-bearing liabilities. Interest expense on deposit accounts was $5.2 million for the quarter
ended March 31, 2004, a decrease of $105,000 from the $5.1 million for the
quarter ended March 31, 2003. Interest expense on deposit accounts declined due
to a 49 basis point decrease in the average cost of deposits. For the three
months ended March 31, 2004, the average cost of deposits was 1.92%, compared
to 2.41% for the three months ended March 31, 2003. A portion of the decline in
interest expense caused by the lower cost of deposits was offset by higher
average balances. Average balances of deposit accounts of $1.1 billion for the
first quarter of 2004 were $238.5 million higher than the average of $843.4
million for the quarter ended March 31, 2003. Interest expense on borrowed funds was $4.4 million for the three months
ended March 31, 2004, compared to $5.3 million for the three months ended March
31, 2003. The $902,000 decline in interest expense on borrowed funds was due to
the combined effects of lower cost and lower average balances of borrowed funds
in the first quarter of 2004, compared to the first quarter of 2003. Borrowed
funds declined to an average balance of $394.7 million during the first quarter
of 2004 from an average of $438.7 million for the first quarter of 2003. The
average cost of borrowed funds declined to 4.48% for the three months ended
March 31, 2004, a decline of 37 basis points, compared to the 4.85% cost of
borrowed funds for the three months ended March 31, 2003. These declines were
the result of a continuation of the low interest rate environment, allowing the
Company to renew previous higher rate, long-term FHLB advances at current lower
rates. Net Interest Income Net interest income for the three months ended March 31, 2004 was $9.4
million, compared to $8.9 million for the first quarter of 2003. Net interest
income increased, despite a decline in the net interest margin, due to higher
levels of interest earning assets. The lowest interest rates in decades have
precipitated high levels of loan prepayments, which combined with reinvestment
in lower yielding loans and investment securities, as well as diminishing
opportunities to continue lowering core deposit interest rates, have caused a
decrease in the net interest margin. The net interest margin declined from
2.58% for the quarter ended March 31, 2003 to 2.42% in the first quarter of
2004. On a linked-quarter basis (December 31, 2003), the net interest margin
declined by two basis points. Increases in non-performing loans have also
placed pressure on the net interest margin. 19




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Provision for Loan Losses The provision for loan losses was $450,000 for the three months ended
March 31, 2004 and 2003. Although the coverage ratio of allowance for loan
losses as a percent of loans increased from 1.13% at December 31, 2003, to
1.18% at March 31, 2004, the Company did not reduce the provision for loan
losses due primarily to an increase in non-performing loans. Non-performing
loans increased from $4.7 million at December 31, 2003 to $7.9 million at March
31, 2004, due to two residential sub-division construction loans and a loan
secured by an industrial building becoming delinquent 90 days or
more. The
allowance for loan losses was $14.3 million at March 31, 2004, compared to
$13.9 million at December 31, 2003. These amounts represent 183% and 296%, of
non-performing loans at March 31, 2004 and December 31, 2003, respectively. Non-Interest Income Total non-interest income declined to $2.9 million for the quarter ended
March 31, 2004, compared to $3.9 million for the quarter ended March 31, 2003,
due primarily to lower gain on sale of loans. Gain on sale of loans was $1.9
million in the current quarter, compared to $3.2 million for the quarter ended
March 31, 2003. The primary reason for the decline was due to lower levels of
loan originations caused by generally increasing mortgage interest rates during
the first quarter of 2004. Total mortgage loan originations were $174.5
million during the quarter ended March 31, 2004, compared to $304.1 million for
the quarter ended March 31, 2003. Generally, the Company sells approximately
one-half of its loan production. Included in the above gain on sale of loans
were gains on sale of loans by the Banks subsidiary, Forward Financial
Company, which amounted to $688,000 and $804,000 for the quarters ended March
31, 2004 and 2003, respectively. Loan processing and servicing fees were a negative $1.0 million for the
quarter ended March 31, 2004, compared to a negative $858,000 for the
comparable quarter in the prior year. Higher prepayment speed assumptions,
caused by a drop in mortgage interest rates at the end of the first quarter of
2004, required an impairment charge of approximately $900,000 against the
Companys OMSRs. This charge increased the valuation allowance of OMSRs to
approximately $1.4 million. With the most recent adjustment, the OMSR balance
of $6.1 million, net of valuation allowance, represents approximately 62 basis
points of the $981.6 million of loans serviced for others. The Company recorded $496,000 in net gain on sale of investments during
the quarter ended March 31, 2004, compared to none in the same prior year
quarter. The net gains resulted from the sale of equity securities and a
portion of its mutual funds during the first quarter of 2004. Non-Interest Expense Total non-interest expense was $10.7 million for the quarter ended March
31, 2004, compared to $9.9 million for the prior year quarter. The first
quarter of 2004 includes $312,000 in amortization of core deposit intangible
(CDI) related to the acquisition of branches. Data processing expense
increased by $140,000, to $646,000 in the first quarter of 2004, primarily due
to the additional data processing expense associated with the consolidation of
the former Broadway National Bank and to a lesser degree, additional costs
associated with the former Encore Bank locations. Advertising expense
increased to $361,000 in the first quarter of 2004, from $299,000 in the prior
year comparable quarter, due to the implementation of a more focused branding
program. Income Tax Expense Income tax expense for the quarter ended March 31, 2004 was $365,000, for
an effective tax rate of 31.2%, which is lower than the expected effective tax
rate of approximately 41%, generally due to the non-taxable nature of income
from bank owned life insurance (BOLI). In the prior year, BOLI income was
essentially offset by non-deductible employee stock ownership plan (ESOP)
expenses. ESOP expenses are no longer being incurred as the remaining shares
in the ESOP were allocated at December 31, 2003. Income tax expense for the
quarter ended March 31, 2003 was $3.9 million, an amount higher than expected
due to the net effect of the REIT tax issue, which increased tax expense by
approximately $3.0 million. The remaining tax of approximately $886,000
resulted in an effective tax rate of 38.1% for the quarter ended March 31,
2003. D. LIQUIDITY AND CAPITAL RESOURCES The primary source of cash flow for the Company is dividend payments from
BFS, interest income, sales and maturities of investment securities and, to a
lesser extent, earnings on deposits held by the Company. Dividend payments have
been used to fund stock repurchase programs, pay dividends to stockholders,
interest on trust-preferred securities and other operating expenses of the 20




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Company. The ability of BFS to pay dividends and other capital
distributions to the Company is generally limited by OTS regulations.
Additionally, the OTS may prohibit the payment of dividends that are otherwise
permissible by regulation for safety and soundness reasons. As of March 31,
2004, BFS had $5.6 million of dividends that could be paid to the Company
without regulatory approval. Any dividend by BFS beyond its current year net
income combined with retained net income of the preceding two years would
require OTS notification or approval. To the extent BFS were to apply for a dividend distribution to the Company
in excess of the regulatory permitted dividend amounts, no assurances can be
made such application would be approved by the regulatory authorities.
Additionally, on an unconsolidated basis, the Company had $2.0 million of securities available for sale and
$5.8 million cash or cash equivalents at March 31, 2004. The Banks 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
borrowings 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. The OTS does not provide specific
guidance for liquidity ratios for BFS, but does require the Bank to maintain
reasonable and prudent liquidity levels. Management believes such levels are
being maintained. The Company 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: 03/31/04
    
    12/31/03(In Thousands)Cash and cash equivalents
    
    $
    50,342
    
    
    $
    34,045Investment securities available for sale
    
    
    73,658
    
    
    
    102,647Mortgage-backed securities available for sale
    
    
    84,539
    
    
    
    83,752Loans held for sale
    
    
    15,806
    
    
    
    12,751Total liquid assets
    
    $
    224,345
    
    
    $
    233,195
 These amounts represent 13.5% and 13.8% of the Companys total assets at
March 31, 2004 and December 31, 2003, respectively. The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances and wholesale-brokered deposits. At March 31,
2004, the Bank had $354.0 million in advances outstanding from the FHLB and
had, with existing collateral, an additional $378.3 million in overall
borrowing capacity from the FHLB. Borrowing capacity can also be further
increased upon delivery of mortgage notes on non-owner occupied one- to
four-family loans, multi-family and commercial loans. The Bank generally does
not pay the highest deposit rates in its market and accordingly utilizes
alternative sources of funds such as FHLB advances and wholesale-brokered
deposits to supplement cash flow needs. At March 31, 2004, the Bank had commitments to originate loans and unused
outstanding lines of credit totaling $301.2 million. Certificate accounts,
which are scheduled to mature in less than one year from March 31, 2004,
totaled $268.1 million. The Bank anticipates that it will have sufficient funds
available to meet its current loan origination commitments and certificate of
deposit withdrawals as they may occur. At March 31, 2004, the consolidated stockholders equity to total assets
ratio was 5.7%. As of March 31, 2004, the Bank exceeded all of its regulatory
capital requirements. The Banks tier 1 (core) capital, total risk-based
capital, tier 1 risk-based and tangible equity capital ratios were 6.1%, 11.2%,
9.9% and 6.1%, respectively. 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK One of the principal market risks affecting the Company is interest rate
risk. The objective of the Companys interest rate risk management function is
to evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Companys business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the 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 21




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relates to its operating strategies. The Companys Board of Directors has
established a management Asset/Liability Committee that is responsible for
reviewing the Companys asset/liability policies and interest rate risk
position. The Committee reports trends and interest rate risk position to the
Board of Directors on a quarterly basis. The extent of the movement of interest
rates is an uncertainty that could have a negative impact on the earnings of
the Company. The Company has utilized the following strategies to manage interest rate
risk:  (1)
    
    emphasizing the origination and retention of adjustable-rate,
one- to four-family mortgage loans;(2)
    
    generally selling in the secondary market substantially all
fixed-rate mortgage loans originated with terms of 15 years or
greater while generally retaining the servicing rights thereof;(3)
    
    primarily investing in investment securities or
mortgage-backed securities with adjustable interest rates; or
shorter-term collateralized mortgage obligations (CMOs); and(4)
    
    attempting to reduce the overall interest rate sensitivity of
liabilities by emphasizing longer-term deposits and utilizing
longer-term FHLB advances to reduce reliance on rate sensitive
retail deposits. A portion of the FHLB advances may be called depending on the level of
interest rates relative to the interest rate being charged at the applicable
call date. Accordingly, if interest rates rise sufficient to trigger the call
feature, the Companys net interest margin may be negatively impacted if called
advances are replaced by new, higher cost advances. The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are interest rate sensitive and
by monitoring the Companys interest rate sensitivity gap. An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. These differences are a primary component of the risk to net
interest income. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Accordingly,
during a period of rising interest rates, an institution with a positive gap
position would be in a better position to reprice loans and invest 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. 22




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At
March 31, 2004, the Companys one-year gap was a positive
1.4% of
total assets, compared to a positive 2.7% of total assets at December 31, 2003. The Companys interest rate sensitivity is also monitored by management
through the use of a model, which internally generates estimates of the change
in net portfolio value (NPV) over a range of interest rate change scenarios.
NPV is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario,
is defined as the NPV in that scenario divided by the market value of assets in
the same scenario. As in the case with the gap analysis, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions, which may or may not
reflect the manner in which actual yields and costs respond to changes in
market interest rates. In this regard, the NPV model used assumes that the
composition of the Companys interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured
and also assumes that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration to maturity or
repricing of specific assets and liabilities. Accordingly, although the NPV
measurements and net interest income models provide an indication of the
Companys interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Companys net interest income
and will differ from actual results. See the Companys Form 10-K for the year
ended December 31, 2003 as filed with the Securities and Exchange Commission on
March 15, 2004, for a detail of the GAP and NPV tables. There have been no
material changes in the net portfolio value since December 31, 2003. 
 Item 4. CONTROLS AND PROCEDURES The Companys management, including the Companys principal executive
officer and principal financial officer, have evaluated the effectiveness of
the Companys disclosure controls and procedures, as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended, (the Exchange Act). Based upon their evaluation, the principal
executive officer and principal financial officer concluded that, as of the end
of the period covered by this report, the Companys disclosure controls and
procedures were effective for the purpose of ensuring that the information
required to be disclosed in the reports that the company files or submits under
the Exchange Act with the Securities and Exchange Commission (the SEC) (1) is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and (2) is accumulated and communicated to the
Companys management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure. In addition, based on that evaluation, no change in the Companys
internal control over financial reporting occurred during the quarter ended
March 31, 2004, that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. 
 PART II - OTHER INFORMATION 
 Item 1. Legal Proceedings The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters is not
expected to have a material adverse effect on the consolidated financial
position, the annual results of operations, or liquidity of the Company. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 23




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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.*31.1
    
    Rule 13a-14(a)/15d-14(a) certification of Chief Executive
Officer31.2
    
    Rule 13a-14(a)/15d-14(a) certification of Chief Financial
Officer32.0
    
    Section 1350 Certifications * Incorporated herein by reference into this document from Exhibits
3.1 and 4.0 to the Form S-1, Registration Statement, and any amendments
thereto, filed with the Commission on July 21, 1995, as amended (Registration
No. 333-94860). ** Incorporated herein by reference into this document from Exhibit 3.2
to the Annual Report on Form 10-K filed with the Commission on March 30, 2000
(File No. 001-13936). (b) Reports on Form 8-K filed with the Securities and Exchange Commission On January 27, 2004, the Company furnished a Form 8-K to file a press
release announcing its financial results for the quarter and year ended
December 31, 2003 and announcing its Annual Meeting Date. On February 11, 2004, the Company furnished a Form 8-K to file a press
release announcing that its December 31, 2003 Investor Presentation was
available on its website. On March 2, 2004, the Company furnished a Form 8-K to file a press release
announcing that Messrs. Holland and Simas would be speaking at Keefe Bruyette
Woods, Inc. Eastern Regional Bank Symposium on March 4, 2004, held in Boston,
Massachusetts. On March 4, 2004, the Company furnished a Form 8-K to file a press release
announcing that the Company and Banks Board would both be expanded by one and
that Mr. Richard J. Caturano was appointed a director of the Company and BFS. 
 EXHIBIT INDEX (31.1)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
    
    Page 26(31.2)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
    
    Page 27(32.0)
    
    Section 1350 Certifications
    
    Page 28
 24




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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: May 10, 2004
    
    By: /s/ David F. HollandPresident and Chief Executive OfficerDate: May 10, 2004
    
    By: /s/ John A. SimasJohn A. SimasExecutive Vice President, Chief FinancialOfficer and Corporate Secretary
 25