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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K  x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2003o
    
    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 
(State or other jurisdiction of
incorporation or organization)
    
    52-1940834 
(I.R.S. Employer Identification No.)
 17 New England Executive Park, Burlington,
Massachusetts
(Address of principal executive offices)
    
    01803
(Zip code)
 Registrants telephone number, including area code: (781) 273-0300
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.01 per share
(Title of class)
    
    The American Stock Exchange
(Name of exchange on which registered)
 Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes x No o The aggregate market value of the voting and non-voting common equity held
by non-affiliates was $109.4 million, based upon the closing price of $26.91 as
listed on the American Stock Exchange as of the last business day of the
registrants most recently completed second fiscal quarter. As of March 5, 2004, the registrants outstanding common stock consisted
of 4,513,896 shares, $.01 par value per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2003 Annual Report to Stockholders are incorporated by reference in Parts II and IV of this Form 10-K.
Portions of the proxy statement for the 2004 Annual Meeting of Stockholders are incorporated by reference in Parts III
and IV of this Form 10-K.




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INDEX PAGEPart IItem 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    26Item 3.
    
    Legal Proceedings
    
    
    28Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28Part IIItem 5.
    
    Market for
Registrants Common Equity and Related Stockholder Matters
    
    
    29Item 6.
    
    Selected Financial Data
    
    
    29Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operation
    
    
    29Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 8.
    
    Financial Statements and Supplementary Data
    
    
    29Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    29Item 9A.
    
    Controls and Procedures
    
    
    29Part IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    31Item 11.
    
    Executive Compensation
    
    
    31Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    31Item 13.
    
    Certain Relationships and Related Transactions
    
    
    32Item 14.
    
    Principal Accountant Fees and Services
    
    
    32Part IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    32SIGNATURESEX-13.0 2003 Annual Report to ShareholdersEx-14.1 Financial Code of EthicsWHISTLEBLOWER POLICYEx-21.0 Subsidiaries of the RegistrantEx-23.0 Consent of Independent AuditorsEx-31.1 Certification of CEOEx-31.2 Certification of CFOEx-32.0 Certification of CEO & CFO - Section 906




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This report contains certain forward-looking statements within the
meaning of the federal securities laws. These statements are not historical
facts, rather statements based on BostonFed Bancorp, Inc.s current
expectations regarding its business strategies, intended results and future
performance. Forward-looking statements may be preceded by terms such as
expects, believes, anticipates, intends and similar expressions. Managements ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends; the general economic climate in the specific
market area in which BostonFed Bancorp, Inc. operates, as well as nationwide;
BostonFed Bancorp, Inc.s ability to control costs and expenses; competitive
products and pricing; loan delinquency rates and changes in federal and state
legislation and regulation. These factors should be considered in evaluating
the forward-looking statements and undue reliance should not be placed on such
statements. BostonFed Bancorp, Inc. assumes no obligation to update any
forward-looking statements. 
 PART I 
 Item 1. Business. General BostonFed Bancorp, Inc. (also referred to as BostonFed or the
Company), headquartered in Burlington, Massachusetts, was organized in 1995
under Delaware law as the holding company for Boston Federal Savings Bank (also
referred to as Boston Federal or the Bank) in connection with the
conversion of Boston Federal from a mutual to stock form of ownership.
BostonFed later acquired Broadway National Bank (Broadway National), a
nationally chartered commercial bank, as its wholly-owned subsidiary. In
December of 2003, BostonFed merged Broadway National with and into Boston
Federal. BostonFed is now a savings and loan holding company regulated by the
Office of Thrift Supervision (OTS). Through Boston Federal, BostonFed attracts retail deposits from the
general public in the greater Boston metropolitan area and other areas of New
England. Additionally, the Company obtains deposits from nationwide brokers.
The Company invests deposits, together with funds generated from operations,
loan sales and borrowings, primarily in one- to four-family residential
mortgage loans. BostonFed also invests in commercial real estate, construction
and land, multi-family mortgage, equity lines of credit, business and consumer
loans (secured by personal and/or real property) and other investments.
BostonFed originates mortgage loans for investment and for sale in the
secondary market, generally retaining the originated mortgage servicing rights. BostonFed, through the December 1999 acquisition of Diversified Ventures,
d/b/a Forward Financial Company (Forward Financial), and a related company,
Ellsmere Insurance Agency, Inc., also originates consumer loans primarily with
customers purchasing or refinancing manufactured homes, recreational vehicles
and boats and subsequently sells substantially all of these loans, servicing
released, to various purchasers (client lenders). This acquisition, along
with the continued increases in business, commercial real estate, construction
lending and home equity loans, has allowed BostonFed to diversify its product
line, asset mix and the geographical area in which it operates. In October 2003, the Company acquired the seven Boston-area branch offices
of Encore Bank. One of the offices was merged into an existing Boston Federal
office. The acquisition resulted in the assumption of $321.9 million of
deposits. The Company recorded a $5.0 million core deposit intangible and $2.0
million of goodwill. 3




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BostonFed continually evaluates mergers, acquisitions and other business
combination opportunities and it may undertake informal discussions or
negotiations that may result in formal discussions and future business
combinations. Transactions of this type have risks relating to, among other
things, the loss of key employees, the disruption of ongoing businesses, the
failure to integrate the combined businesses and the failure to achieve
expected synergies. BostonFed cannot predict what the consequences would be of
any such business combination. However, an unsuccessful business
combination, and other factors, could ultimately result in BostonFeds
divestiture or termination of a business segment. In addition, any business
combination in which BostonFed issues common stock could dilute the ownership
interest of its stockholders. Available Information The Company maintains an Internet website at http://www.bostonfed.com,
where the Companys annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to such reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act
of 1934, as amended, and other related information, are available free of
charge as soon as reasonably practicable after the Company electronically files
those documents with, or otherwise furnishes them to, the Securities and
Exchange Commission. BostonFeds internet website and the information
contained therein or connected thereto are not intended to be incorporated into
this Annual Report on Form 10-K. Market Area and Competition BostonFed has been, and intends to remain, a community-oriented financial
institution offering a variety of financial products and services to meet the
needs of the communities it serves. BostonFed obtains deposits largely from
the communities surrounding its offices and extends loans throughout eastern
Massachusetts and, to a lesser extent, other areas of New England. Forward
Financial currently provides its consumer lending services in twenty states,
through two offices. BostonFed faces significant competition both in generating loans and in
attracting deposits. The Boston metropolitan area is a highly competitive
market and the national market for consumer lending is also very competitive.
BostonFeds share of deposits and loan originations in eastern Massachusetts
amounts to less than one percent. BostonFed faces direct competition from a
significant number of financial institutions operating in its market area, many
with a state-wide or regional presence and, in some cases, a national presence.
Many of these financial institutions are significantly larger and have greater
financial resources than BostonFed. BostonFeds competition for loans comes
principally from commercial banks, savings banks, mortgage banking companies,
credit unions, consumer finance, pension funds and insurance companies. Its
most direct competition for deposits has historically come from savings and
commercial banks and in recent years from mutual funds and equity markets. In
addition, BostonFed faces increasing competition for deposits from non-bank
institutions such as brokerage firms and insurance companies in such
instruments as short-term money market funds, corporate and government
securities funds and annuities. Increased competition for customers can result
in erosion of the Banks customer base and result in the Bank pricing its
products and services more aggressively to maintain its respective customer
base which in turn could result in reduced levels of net interest income and
net income. Dependence on Regional and Local Economy Economic conditions at the local and national levels, as well as
government policies and regulations concerning, among other things, monetary
and fiscal affairs, significantly affect the operations of financial
institutions such as the Bank. The Companys operations depend upon the
economic conditions in the New England region of the United States,
particularly the greater Boston metropolitan area and southern New Hampshire
(the Banks primary market area). To this extent, if the local and regional
economic conditions 4




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deteriorate or there is a downturn in the market values of
properties in the Banks primary market areas, it would likely have an adverse
impact on the Company. Lending Activities Loan Portfolio Composition.BostonFeds loan portfolio consists primarily
of first mortgage loans secured by one- to four-family residences. To a lesser
extent, BostonFeds loan portfolio also includes multi-family, commercial real
estate, construction and land development, business and consumer loans. The types of loans that BostonFed may originate are subject to extensive
regulation by federal, state and local authorities, and various laws and
judicial and administrative decisions imposing requirements and restrictions on
BostonFeds lending activities and general operations. Policies adopted by
these government entities can significantly affect BostonFeds business
operations. In addition, the OTS and other authorities periodically conduct
examinations of the Company and the Bank and may impose various requirements or
sanctions. Interest rates charged by BostonFed on loans are affected by the demand
for such loans and the supply of money available for lending purposes and the
rates offered by competitors. These factors are, in turn, affected by, among
other things, economic conditions and the monetary policies of the federal
government, including its various regulatory agencies and legislative tax
policies. For additional information on the composition of BostonFeds loan
portfolio, see Managements Discussion and Analysis of Financial Condition and
Results of Operations  Financial Condition Loans. Origination, Sale, Servicing and Purchase of Mortgage, Business and
Consumer Loans.BostonFed conducts its mortgage and consumer finance lending
activities primarily through its offices, commissioned loan personnel, and
wholesale brokers and other correspondent financial institutions approved by
BostonFed. All mortgage loans that BostonFed originates, either through
internal sources or wholesale brokers or other correspondent financial
institutions, are underwritten by BostonFed according to its policies and
procedures. BostonFed originates both adjustable-rate and fixed-rate loans and its
ability to originate these loans is affected by the current and expected level
of interest rates, economic conditions and competition, all of which affect
customer demand. BostonFeds general policy is to sell a substantial majority of the one-
to four-family fixed-rate mortgage loans with maturities of fifteen years or
over. It generally retains adjustable-rate loans and fixed-rate loans with
maturities of under fifteen years sufficient to meet its portfolio needs.
BostonFed generally retains the servicing of mortgage loans sold. Loan
servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections as required of mortgaged premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain insurance and
tax payments on behalf of the borrowers and generally administering the loans.
At December 31, 2003, BostonFed was servicing $1.0 billion of mortgage loans
for others. The gross servicing fee income from loans sold is generally 0.25% to 0.38%
of the total balance of the loans serviced. BostonFed typically does not
purchase servicing rights related to mortgage loans originated by other
institutions. BostonFed recognizes the present value of the servicing income,
net of servicing expenses, attributable to servicing rights upon sale of the
loan. BostonFed amortizes the capitalized mortgage servicing rights using a
method which approximates the level yield method in proportion to, and over 5




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the period of, estimated net servicing income. BostonFed reviews prepayment
activity on its serviced loans and evaluates mortgage servicing for impairment
at least quarterly and adjusts its capitalized mortgage servicing rights
amortization schedule accordingly. Generally, a decline in market interest
rates will cause expected repayment speeds to increase, resulting in a lower
valuation for mortgage servicing rights and ultimately impairment of those
servicing rights. As of December 31, 2003, BostonFed had $7.1 million of
capitalized mortgage servicing rights, representing 73 basis points of loans
serviced for others. BostonFed also originates business loans through its business lending
department, which was established in 1998. The loans are generally secured by
the business assets, such as equipment, machinery, receivables, inventory,
etc., of the borrower. Typically, the loans are either term or line of credit. Additionally, BostonFed, through Forward Financial, originates loans on
manufactured homes, recreational vehicles and boats. Forward Financial
originates and sells substantially all of its consumer loans, servicing
released, to client lenders. The client lenders impose their underwriting
standards and if they consider an application satisfactory and accept it, the
loan is approved for closing. In this manner, Forward Financial eliminates its
exposure to nearly all interest rate risk and credit risk on such loans.
Forward Financial receives a fee upon the sale of loans and records such
revenue as gain on sale of loans. Because these loans are generally sold
without recourse, Forward Financial has minimal credit risk exposure. At
December 31, 2003, Forward Financial had no repossessed assets. Equity loans are originated in the form of lines of credit, primarily
secured by second mortgages on one- to four-family residences in BostonFeds
market area. These lines of credit generally provide consumers with a
tax-advantaged and flexible borrowing arrangement. Occasionally, BostonFed is the lead bank in generally larger loans,
usually retaining 50% or more of the balance and participating-out the
remaining balance of the loan. At December 31, 2003, BostonFed was the lead
bank in eight loans with a cumulative total balance of $76.3 million.
BostonFeds portion was $48.4 million, of which $34.1 million had been
disbursed. BostonFed also participates in loans when a correspondent financial
institution has underwritten the loan according to BostonFeds policies and
closed the loan in its own name. BostonFeds participation in commercial real
estate loans and business loans originated and serviced by other financial
institutions totaled $1.2 million and $12.2 million, respectively, at December
31, 2003. BostonFed has also purchased one- to four-family whole loans that are
being serviced by others. The balance of these loans at December 31, 2003, was
approximately $2.4 million. BostonFed engages in certain hedging activities to facilitate the sale of
its originated and purchased mortgage loans and to minimize its interest rate
risk between the time the loan commitments are made and the time the loans are
securitized or packaged and sold. BostonFed currently utilizes forward loan
sale commitment contracts with Fannie Mae, Freddie Mac and other investors as
its method of hedging loan sales. Generally, BostonFed will enter into
contracts to deliver loans or agency mortgage-backed securities to purchasers
for a specified price at a future date while it processes and closes loans,
thereby protecting the price of currently processed loans from interest rate
fluctuations that may occur from the time the interest rate on the loan is
fixed to the time of sale. Loans that are closed and funded may also be pooled
to create mortgage-backed securities which can be delivered to fulfill the
forward commitment contracts. The amount of forward coverage of the pipeline
of mortgages is set on a day-to-day basis by an operating officer, within
policy guidelines, based primarily on BostonFeds assessment of the levels of
mortgage-origination activity. Risks may arise from the possible inability of
BostonFed to originate loans to fulfill the contracts, in which case BostonFed
would repurchase the forward commitment at the then prevailing market prices.
For the year 6




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ended December 31, 2003, BostonFed had $7.0 million in net gains
attributable to the sale of mortgage loans. Forward Financial recorded $3.5
million in net gains, the vast majority of which was attributable to the sale
of consumer loans. For additional information about BostonFeds loan originations, sales and
purchases of mortgage business and consumer loans, see Managements Discussion
and Analysis of Financial Condition and Results of Operations  Financial
Condition  Loans. One- to Four-Family Mortgage Lending.BostonFed offers both fixed-rate
and one, three, five and seven year adjustable-rate mortgage loans with
maturities of generally up to thirty years. The interest rates for the
majority of BostonFeds adjustable-rate mortgage loans are indexed to the
Constant Maturity Treasury Index (CMT Index). BostonFed currently offers
fixed-rate mortgage loans with amortization periods of five to thirty years and
a number of adjustable-rate mortgage loan programs with amortization schedules
ranging from ten to thirty years. BostonFed originates adjustable-rate
mortgage loans that have fixed interest rates for an initial period then adjust
annually or a greater period according to their terms. The one- to four-family
adjustable-rate loan products generally reprice based on a margin in effect
when the loan was originated, currently 275 to 350 basis points over the CMT
Index for the Treasury security of a maturity, which is comparable to the
interest adjustment period for the loan. Generally, all of BostonFeds
adjustable-rate mortgage loans provide for periodic (generally 2%) and overall
caps (generally 6%) on the increase or decrease in interest rate at any
adjustment date and over the life of the loan, respectively. BostonFed generally originates one- to four-family residential mortgage
loans in amounts up to 80% of the appraised value or the selling price of the
property securing the loan, whichever is lower, and
up to 100% of the appraised value or selling price if private mortgage
insurance is obtained for the portion of the loan that exceeds 75% of the
appraised value or selling price, whichever is lower. However, BostonFed may
originate single-family or two-family owner-occupied mortgage loans under
certain loan programs in amounts up to 90% of the appraised value or selling
price, whichever is lower, without private mortgage insurance. Multi-Family Mortgage Lending.BostonFed originates multi-family mortgage
loans that are generally secured by five to 120 unit apartment buildings. Its
decision to make a multi-family loan is influenced by the value of the
underlying property, as well as the qualifications of the borrower. BostonFed
also considers the following factors: the net operating income of the
mortgaged premises before debt service and depreciation; the debt service
coverage ratio (the ratio of earnings before debt service to debt service); and
the ratio of loan amount to appraised value. BostonFed generally requires a
debt service ratio of 115% or greater. Pursuant to BostonFeds current
underwriting policies, a multi-family mortgage loan may generally be made in an
amount up to 85% of the appraised value of the underlying property to a maximum
loan amount of $7.5 million. However, most loans are granted at or below 80%
of the appraised value. If possible, personal guarantees of the principal
borrower are obtained on multi-family loans made to corporations, partnerships
and other business entities. Depending upon the creditworthiness of the
borrower and amount of the down payment, BostonFed may make an exception and
not require a personal guarantee, or may require limited recourse on such
loans. When evaluating the qualifications of the borrower for a multi-family
loan, BostonFed considers the borrowers financial resources, income level and
experience in owning or managing similar property, as well as BostonFeds
lending experience with the borrower. BostonFeds underwriting guidelines
require the borrower to demonstrate strong management skills and the ability to
maintain the property from current rental income. The borrower is also
required to present evidence of the ability to repay the mortgage and a history
of making mortgage payments on a timely basis. Generally, BostonFed assesses
the creditworthiness of a borrower by reviewing the financial and pro-forma
cash-flow statements on the property and the employment and credit history of
the guarantor, as well as other related documentation. At December 31, 2003, the largest 7




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multi-family loan outstanding balance was a $4.6 million performing
loan secured by an apartment building located in Arlington, Massachusetts. Loans secured by apartment buildings and other multi-family residential
properties generally involve a greater degree of risk than one- to four-family
residential mortgage loans and typically involve higher loan principal amounts.
Repayment of multi-family loans generally is dependent, in large part, on
sufficient income from the property to cover operating expenses and debt
service. The Bank currently originates loans secured by multi-family
properties on a limited basis. The Bank attempts to offset the risks
associated with multi-family lending by primarily lending to individuals who
will be actively involved in the management of the property and who have proven
management experience, and by making such loans with lower loan-to-value ratios
than one- to four-family loans. Economic events and government regulations,
which are outside the control of the borrower or lender, could impact the value
of the security for such loans or the future cash flow of the affected
properties. Additionally, in past periods of declining real estate values in
the Banks lending areas, such declines were more pronounced with respect to
multi-family than owner-occupied one- to four-family properties. As a result,
in periods of declining real estate values, multifamily loans may be more
adversely affected than one- to four-family loans. See BusinessDependence on
Regional and Local Economy. Commercial Real Estate Lending.BostonFed originates commercial real
estate loans that are secured by properties generally used for business
purposes such as office buildings, retail facilities, hotels, manufacturing
facilities, etc. BostonFeds underwriting policies allow commercial real
estate loans to be made in amounts up to the lesser of 85% of the appraised
value of the property, or BostonFeds current maximum loan limit. Currently,
the maximum loan limit is $7.5 million. However, BostonFed will generally not
grant loans that exceed 80% of the appraised value. BostonFed currently originates commercial real estate loans with terms of
up to twenty-five years, the majority of which contain adjustable-rates and are
indexed primarily to the CMT or an FHLB Index. BostonFed generally applies the
same underwriting standards and procedures to commercial real estate loans as
it does for multi-family loans. BostonFed generally requires that the
properties securing commercial real estate loans have debt service coverage ratios of at least
115%. Generally, all commercial real estate loans made to corporations,
partnerships and other business entities require personal guarantees by the
principal borrowers. On an exception basis, BostonFed may not require a
personal guarantee, or may require limited recourse on such loans depending on
the creditworthiness of the borrower and the amount of the down payment.
BostonFeds commercial real estate loan portfolio at December 31, 2003, was
$123.5 million, or 10.0 % of total loans. The largest commercial real estate
loan outstanding balance in BostonFeds portfolio at December 31, 2003, was a
$6.8 million performing loan secured by a storage facility located in Danvers,
Massachusetts. Loans secured by commercial real estate properties usually involve a
greater degree of risk than one- to four-family residential mortgage loans and
typically involve higher loan principal amounts. Repayment of commercial real
estate loans generally is dependent, in large part, on sufficient income from
the property to cover operating expenses and debt service. The Bank attempts
to offset the risks associated with commercial real estate lending by primarily
lending to individuals who will be actively involved in the management of the
property and who have proven management experience, and by making such loans
with lower loan-to-value ratios than one- to four-family loans. Economic
events and government regulations, which are outside the control of the
borrower or lender, could impact the value of the security for such loans or
the future cash flow of the affected properties. Additionally, in past periods
of declining real estate values experienced in the Banks lending areas, such
declines were more pronounced with respect to commercial properties than
owner-occupied one- to four-family properties. As a result of these and other
factors, such types of loans may experience higher degrees of delinquencies and
charge-offs as compared to one- to four- family loans 8




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in periods of declining economic activity and real estate values. See BusinessDependence on Regional
and Local Economy. Construction and Land Lending.BostonFed originates loans for the
acquisition and development of property to licensed and experienced contractors
in its primary market area. The majority of BostonFeds construction loans
have been made to finance the construction of one- to four-family residential
properties, multi-family residential buildings, commercial real estate, hotels
and other facilities. BostonFed originates loans secured by land, but it does
not originate such loans unless the borrower has also secured sub-division
approval to obtain financing for the construction of structures on the
property. These loans are primarily adjustable-rate loans with maturities of
less than two years. BostonFed originates construction and land mortgage loans in amounts up to
75% of the lesser of the appraised value of the property, as improved, or sales
price, unless such loan is for the construction of a residential property which
cannot exceed an 80% loan-to-value ratio. BostonFed disburses proceeds of the
loans as phases of the construction are completed. If possible, personal
guarantees of the principal borrowers are obtained on loans to a corporation,
partnership or other business entity. In some instances, BostonFed may not
require a personal guarantee, or may require limited recourse on such loans
depending on the creditworthiness of the borrower and the loan-to-value ratio.
Currently, BostonFeds maximum loan limit is $7.5 million. BostonFeds largest
construction and land loan outstanding balance at December 31, 2003, was a
performing loan of $9.0 million, as an exception was made to the maximum loan
limit of BostonFeds policy. This property is secured by an office building
located in Marlborough, Massachusetts. Construction and land financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan depends
largely upon the accuracy of the initial estimate of the propertys value at
completion of construction or development compared to the estimated cost
(including interest, sellout period and other costs) of construction. If the
estimate of value proves to be inaccurate, BostonFed may be confronted with a
project, when completed, having a value which is insufficient to assure full
repayment. See BusinessDependence on Regional and Local Economy. Business Loans.BostonFed began originating loans to businesses and
corporations in 1998. These loans are generally secured by the assets of the
borrowing entity. The most typical type of loans generated for BostonFed are
term loans and lines of credit. These loans generally require the personal
guaranty of the principal borrowers. Depending upon the creditworthiness of
the borrower and the loan-to-value ratio, however, personal guarantees may not be required, or only a
limited recourse may be required on such loans. BostonFed has separate lending
guidelines and underwriting standards for this type of lending. These
guidelines currently limit the maximum loan to $7.5 million. The largest
outstanding business loan balance in BostonFeds portfolio as of December 31,
2003, was a $3.0 million performing loan secured by business assets located in
Winchester, Massachusetts. Unlike residential mortgage loans, which generally
are made on the basis of the borrowers ability to make repayment from his or
her employment or other income, and which are secured by real property with a
value that tends to be more easily ascertainable, business loans are of higher
risk and typically are made on the basis of the borrowers ability to make
repayment from the cash flow of the borrowers business. As a result, the
availability of funds for the repayment of business loans may depend
substantially on the success of the business itself. Further, any collateral
securing such loans may depreciate over time, may be difficult to appraise and
may fluctuate in value. 9




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Equity Lines.Substantially all of BostonFeds home equity lines of
credit are secured by second mortgages on one- or two-family residences located
in BostonFeds primary market area. Generally, under the terms of BostonFeds
home equity lines of credit, borrowers may draw on such lines of credit and
repay outstanding interest on a monthly basis over a period of up to ten years.
Thereafter, the outstanding balance drawn on such lines of credit is converted
to an adjustable-rate loan with a term of up to ten years. BostonFeds
underwriting standards include evaluating an applicants credit history and
assessing the applicants ability to meet existing obligations and payments on
the proposed loan and the value of the collateral securing the loan. These
loans generally involve a higher risk than first mortgage loans on one-to four-
family housing. Other Lending.Other loans consist primarily of consumer loans such as
automobile loans and loans secured by savings accounts. Such loans are
generally originated in BostonFeds primary market area. Collections.Loans secured by rapidly depreciable assets such as
equipment, machinery, automobiles, etc., or that are secured by accounts
receivable or inventories or are unsecured loans entail greater risks than one-
to four-family residential mortgage loans. In such cases, repossessed
collateral for a defaulted loan may not provide an adequate source of repayment
of the outstanding loan balance, because there is a greater likelihood of
damage, loss or depreciation of the underlying collateral. Further, loan
collections on these loans depend on the borrowers continuing financial
stability and, therefore, are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Finally, various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans in the event of a default. Mortgage Loan Approval Procedures and Authority.The Board of Directors
establishes the lending policies and loan approval limits of the Bank. Such
limits are included in a matrix with the corresponding level of authority
requirements. At the Bank, approval by the Investment Committee, comprised of
independent directors, is generally required on all one- to four-family loans
in excess of $1.5 million, on all commercial real estate, multi-family and
non-owner occupied construction loans and all business loans in excess of $3.5
million. The amounts for full Board approval are $2.5 million and $5.0
million, respectively. According to the regulations of the Office of Thrift Supervision (the
OTS), loans to one borrower cannot, subject to certain exceptions, exceed 15%
of the Banks unimpaired capital surplus and applicable allowance for loan
losses. At December 31, 2003, the regulatory loans to one borrower limit was
$16.6 million for the Bank. The Banks internally set limit was $9.0 million. Nonperforming and Problem Assets Classified Assets.BostonFeds Asset Classification Policy and federal
regulations require that BostonFed use an internal asset classification system
as a means of reporting problem and potential problem assets. There are three
classifications for problem assets: substandard, doubtful and loss.
Substandard assets are inadequately protected by the collateral pledged, if
any, or the current net worth and paying capacity of the obligor and are
characterized by the distinct possibility that the institution will sustain
some loss if the deficiencies are not corrected. Doubtful assets have the
weaknesses of substandard with the additional characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, highly questionable and improbable. An
asset classified as loss is considered uncollectible and of such little value
that its continuance as an asset of the institution is not warranted. If an
asset or portion thereof is classified as a loss, the insured institution
establishes specific allowances for loan losses for the full amount of the
portion of the asset classified as loss. All or a portion of general loan loss
allowances established to cover probable losses related to assets can be
included in 10




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determining an institutions regulatory capital, while specific
loss reserves do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses,
are required to be designated as special mention. Boston Federals Asset Classification Committee reviews and classifies
assets on a quarterly basis and reports the results of its review to the Board
of Directors. Additionally, an independent internal loan reviewer, who reports
directly to the Boards Investment Committee, reviews and classifies loans.
The Bank also utilizes the services of a loan review firm. BostonFed
classifies assets according to the management guidelines described above. At
December 31, 2003, BostonFed had $32.9 million of assets designated as special
mention and $22.9 million of assets designated as substandard. Included in
these amounts was $4.7 million in non-performing loans at December 31, 2003.
In the opinion of management, the remaining special mention and substandard
loans of $51.1 million evidence one or more weaknesses or potential weaknesses
and, depending on the regional economy and other factors, may become
non-performing assets in future periods. Additional classified assets include
no loans designated as doubtful and $2.3 million of assets designated as
loss. All assets classified as loss have been charged off for financial
statement purposes. For additional information about BostonFeds classified assets, see
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Financial Condition  Asset Quality. Non-Performing Assets and Restructured Loans.At December 31, 2003, the
Bank had five restructured loans totaling $3.9 million. Restructured loans are
impaired loans where one or more of the original contract terms have been
modified in a concession the Company would not otherwise consider but for
economic or other reasons pertaining to the debtors difficulties. Real estate
owned and repossessed assets, net, totaled $1.8 million consisting of an
industrial and office building. It is the policy of BostonFed to cease
accruing interest on loans 90 days or more past due and to charge-off all
interest previously accrued on such loans. The balance of non-performing loans
at December 31, 2003, was $4.7 million. For the years ended December 31, 2003,
2002, 2001, 2000 and 1999, the amount of additional interest income that would
have been recognized on non-performing loans if such loans had continued to
perform in accordance with their contractual terms was $271,000, $172,000,
$32,000, $40,000 and $(2,000), respectively. For the same periods, the
difference between the amount of interest income that would have been
recognized on impaired loans if such loans were performing in accordance with
their regular terms and amounts recognized was $322,000, $60,000, $0, $0 and
$2,000, respectively. At December 31, 2003, loans which were characterized as impaired
pursuant to Statement of Accounting Standards 114 and 118 totaled $3.9 million.
All of the impaired loans have been measured using the discounted cash flow
method or the fair value of the collateral method if the loan is collateral
dependent. During the year ended December 31, 2003, the average recorded value
of impaired loans was $7.5 million, interest income of approximately $220 was
recognized, all of which was recorded on a cash basis, and $544,000 of interest
income would have been recognized under the original terms. At December 31,2003
    
    2002
    
    2001(Dollars in thousands)Impaired loans:Business
    
    $
    1,396
    
    
    
    2,063
    
    
    
    Construction
    
    
    
    
    
    
    2,165
    
    
    
    Commercial real estate
    
    
    2,541
    
    
    
    4,163
    
    
    
    216Total
    
    $
    3,937
    
    
    
    8,391
    
    
    
    216
 11




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For additional information about BostonFeds non-performing assets and
restructured loans, see Managements Discussion and Analysis of Financial
Condition and Results of Operations  Financial Condition  Asset Quality. Allowance for Loan Losses.The Company maintains an allowance for losses
that is 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. Management believes the allowance is adequate to absorb probable loan
losses. Managements methodology to estimate loss exposure inherent in the
portfolio include an analysis of individual loans deemed to be impaired,
reserve allocations for various loan types based on payment status or loss
experience, risk ratings 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 for
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination. While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions. Accordingly, the ultimate collectibility of a substantial portion
of the Companys loan portfolio is affected by changes in market conditions. Amounts provided for the years 2003, 2002 and 2001 were $3.4 million, $1.4
million and $820,000, respectively. The increase in the provision for the
year ended December 31, 2003, was due to a charge-off of $1.6 million which
required replenishment of the allowance. During the years ended December 31,
2003, 2002 and 2001, there were $2.3 million, $1.4 million and $234,000,
respectively, in charge-offs against this allowance. For the years ended
December 31, 2003, 2002 and 2001, there were recoveries of $130,000, $359,000
and $361,000, respectively, credited to the allowance. As of December 31, 2003
and 2002, the Companys allowance for loan losses was 1.13% of total loans. The Company had non-performing loans of $4.7 million and $5.5 million at
December 31, 2003, and December 31, 2002, respectively. The Bank believes that
its policies and procedures related to monitoring and resolution of problem
loans and assets are adequate. In this regard, the Bank monitors its
problem loans and, based on information known to management at such time,
establishes reserves against foreseeable losses related to such loans. While
the Bank believes that it has established adequate reserves against such loans
or written down the values of the properties securing such loans to reflect the
current estimated fair values of such properties, no assurance can be provided
that the properties securing such loans will not further decrease in value or
can be sold for their estimated fair values in the event the Bank forecloses or
takes possession of such properties or that the Bank will not experience
further losses related to such loans. The Company will continue to monitor and modify its allowance for loan
losses as conditions dictate. While management believes the Companys
allowance for loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurances can be given that the Companys level of
allowance for loan losses will be sufficient to cover future loan losses
incurred by the Company or that future adjustments to the allowance for loan
losses will not be necessary if economic and other conditions differ substantially from the 12




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economic and other conditions used by management to
determine the current level of allowance for loan losses. For additional information on BostonFeds loan loss allowance and the
process for evaluating its adequacy, see Managements Discussion and Analysis
of Financial Condition and Results of Operations  Financial Condition  Asset
Quality. Real Estate Owned and Other Repossessed Assets At December 31, 2003, BostonFed had $1.8 million of real estate owned, net
of valuation allowances and no other repossessed assets. The real estate owned
consisted of an industrial and office building in Woburn, Massachusetts. When
BostonFed acquires property through foreclosure or deed in lieu of foreclosure,
it is initially recorded at the lower of the recorded investment in the
corresponding loan or the fair value of the related assets at the date of
foreclosure, less costs to sell. Thereafter, if there is a further
deterioration in value, BostonFed provides for a specific valuation allowance
and charges operations for the diminution in value. It is the policy of
BostonFed to obtain an appraisal on all real estate subject to foreclosure
proceedings prior to the time of foreclosure and continue to appraise
foreclosed properties and conduct inspections on a periodic basis. Investment Activities The investment policy of BostonFed, as approved by the Board of Directors,
requires management to maintain adequate liquidity, generate a favorable return
on investments without incurring undue interest rate and credit risk and to
complement BostonFeds lending activities. Generally, BostonFeds investment
policy is more restrictive than federal regulations allow. Accordingly,
BostonFed has invested primarily in United States government and agency
securities, mutual funds which qualify as liquid assets under applicable
regulations, federal funds and United States government-sponsored agency issued
mortgage-backed securities and privately-issued collateralized mortgage
obligations (CMOs). The Company has also invested in corporate bonds, trust
preferred securities and other investment vehicles. BostonFed has established
an investment portfolio of securities that are categorized as held to maturity,
available for sale or held for trading. BostonFed does not currently maintain
a portfolio of securities categorized as held for trading. The investment
policy provides different management levels of approval, from the investment
officer up to and including the Board of Directors, depending on the size of
purchase or sale and monthly cumulative purchase or sale amounts. Generally,
according to BostonFeds policies, the Board must provide prior approval for
all individual securities investments over $10.0 million and approval for all
monthly purchases which aggregate $25.0 million or more. On a quarterly basis,
BostonFeds Board and Boston Federals Investment Committee are provided with
activity reports and summaries of the held to maturity and available for sale
investment portfolios of the Bank. Activity reports are also provided to the
Board monthly. Investments in mortgage-backed securities involve a risk that actual
prepayments will be greater than estimated prepayments over the life of the
security, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments thereby reducing or
increasing the net yield on such securities. Conversely, prepayments may be
less than estimated amounts, thus extending the average life of the instrument
beyond the original anticipated maturity. There is also reinvestment risk
associated with the cash flows from such securities or in the event such
securities are redeemed by the issuer. In addition, the market value of such
securities may be adversely affected by changes in interest rates. For additional information about BostonFeds investment activities, see
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Financial Condition  Changes in Financial Condition  Assets. 13




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##### Table of Contents



Sources of Funds General.Retail deposits, wholesale brokered deposits, loan repayments
and prepayments, proceeds from sales of loans, cash flows generated from
operations and Federal Home Loan Bank advances are the primary sources of
BostonFeds funds for use in lending, investing and for other general purposes. Deposits.BostonFed offers a variety of deposit accounts with a range of
interest rates and terms. BostonFeds deposits consist of savings, NOW
accounts, checking accounts, money market accounts and certificate of deposit
accounts. At December 31, 2003, core deposits (excluding certificates of
deposit) represented 56.2% of total deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. BostonFeds deposits
are obtained predominantly from the areas in which its branch offices are
located. BostonFed relies primarily on customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions,
mutual funds and equity markets significantly affect BostonFeds ability to
attract and retain deposits. BostonFed uses traditional means of advertising
its deposit products, including radio and print media and generally does not
solicit deposits from outside its market area except through the use of
wholesale brokered deposits which declined by $14.9 million during 2003 and
increased by $40.8 million during 2002. Brokered deposits were $117.8 million
and $132.7 million at December 31, 2003 and 2002, respectively. The following table presents the deposit activity of BostonFed for the
periods indicated: For the Year Ended December 31,2003
    
    2002
    
    2001(Dollars in thousands)Net increase in deposits
    
    $
    208,794
    
    
    
    53,421
    
    
    
    4,766Interest credited on deposit accounts
    
    
    19,476
    
    
    
    22,341
    
    
    
    30,103Total increase in deposit accounts
    
    $
    228,270
    
    
    
    75,762
    
    
    
    34,869
 At December 31, 2003, BostonFed had $93.3 million in certificate accounts
in amounts of $100,000 or more (excluding wholesale deposits) maturing as
follows: WeightedMaturity Period
    
    Amount
    
    Average Rate(Dollars in thousands)Three months or less
    
    $
    17,082
    
    
    
    1.89
    %Over 3 through 6 months
    
    
    10,986
    
    
    
    2.37Over 6 through 12 months
    
    
    19,818
    
    
    
    3.08Over 12 months
    
    
    45,424
    
    
    
    3.82Total
    
    $
    93,310
    
    
    
    3.14
    %
 14




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##### Table of Contents



For additional information about BostonFeds deposit accounts, see
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Financial Condition  Overview of Financial Condition (Liabilities
and Capital). Borrowings.BostonFed utilizes advances from the Federal Home Loan Bank
(FHLB) as an alternative to retail deposits to fund its operations and may do
so in the future as part of its operating strategy. These FHLB advances are
collateralized primarily by certain of BostonFeds mortgage loans and
mortgage-backed securities, mutual funds, investment securities and secondarily
by BostonFeds investment in capital stock of the FHLB. FHLB advances are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB will
advance to member institutions fluctuates from time to time in accordance with
the policies of the OTS and the FHLB. During the year ended December 31, 2003,
BostonFed decreased its net borrowings from the FHLB by $60.9 million to a
balance of $365.7 million. A portion of the FHLB advances may be called
depending on the level of interest rates relative to the interest rate being
charged on 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. For additional information about BostonFeds borrowed funds, see
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Financial Condition Overview of Financial Condition (Liabilities
and Capital). Corporation Obligated Mandatory Redeemable Capital Securities On July 12, 2000, BostonFed sponsored the creation of BFD Preferred
Capital Trust I (Trust I), a New York common law trust. BostonFed is the
owner of all of the common securities of the Trust I. On July 26, 2000, the
Trust I issued $10.0 million of its 11.295% Capital Securities through a pooled
trust preferred securities offering. The proceeds from this issuance, along
with BostonFeds $309,000 capital contribution for the Trust I common
securities, were used to acquire $10.3 million aggregate principal amount of
the Companys 11.295% Junior Subordinated notes due July 19, 2030, which
constitute the sole asset of the Trust I. BostonFed has, through the Trust I
agreement establishing Trust I, the Guarantee Agreement, the notes and the
related Indenture, taken together, fully irrevocably and unconditionally
guaranteed all of the Trust Is obligations under the Capital Securities. On August 18, 2000, BostonFed sponsored the creation of BFD Preferred
Capital Trust II (Trust II), a statutory business trust created under the
laws of Delaware. BostonFed is the owner of all of the common securities of
the Trust II. On September 22, 2000, the Trust II issued $22.0 million of its
10.875% Capital Securities. The proceeds from this issuance, along with
BostonFeds $681,000 capital contribution for the Trust II common securities,
were used to acquire $22.7 million aggregate principal amount of BostonFeds
10.875% Junior Subordinated Debentures due October 1, 2030, which constitute
the sole assets of Trust II. BostonFed has, through the Declaration of Trust
and the Amended and Restated Declaration of Trust establishing Trust II, the
Common Securities and the Capital Securities Guarantee Agreements, the
debentures and related Indenture, taken together, fully, irrevocably and
unconditionally guaranteed all of Trust IIs obligations under the Capital
Securities. In
December 2003, the Financial Accounting Standards Board
(FASB) issued guidance (revised FASB Interpretation
(FIN) No. 46R), which in part specifically addresses
limited purpose trusts formed to issue trust preferred securities.
FIN No. 46R among other items, requires the Company to
deconsolidate its two trust preferreds. Because the Company had
already been classifying the trust preferreds as debt, the impact of
adopting FIN No. 46R as of December 31, 2003 had a minimal
impact. Certain Anti-Takeover Provisions Which May Discourage Takeover Attempts Certain provisions of BostonFeds Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, as well as certain federal
regulations, assist BostonFed in maintaining its status as an independent,
publicly-owned corporation. These provisions provide for, among other things, supermajority 15




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voting on certain matters, staggered boards of directors,
non-cumulative voting for directors, limits on the calling of special meetings,
and limits on voting shares in excess of 10% of the outstanding shares. These
provisions in BostonFeds governing instruments may discourage potential proxy
contests and other potential takeover attempts, particularly those which have
not been negotiated with the Board of Directors, and thus, generally may serve
to perpetuate current management. Ability to Pay Dividends BostonFed is a holding company and all of its operations are conducted
through its bank subsidiary. Therefore, BostonFeds ability to pay dividends
is dependent upon the earnings of its subsidiary and its ability to pay
dividends or make other payments to BostonFed. Certain laws and regulatory
requirements limit the ability of subsidiaries to pay dividends or make other
payments to BostonFed. Bank Subsidiary Activities Leader Corporation, incorporated under Massachusetts law, is a wholly
owned subsidiary of Boston Federal. During 2003, Boston Federal continued its
relationship with Independent Financial Marketing Group (IFMG), a third-party
marketer (previously owned by Liberty Financial), now owned by Sun Life of
Canada, to provide non-FDIC insured alternative investment products in
segregated areas of Boston Federals branches. Under this contract, IFMG
leases space from Boston Federals branch locations and pays rent and a
percentage of sales to Leader Corporation. Forward Financial was acquired by Boston Federal in December 1999.
Forward Financial is incorporated under Massachusetts law and operates as a
subsidiary of Boston Federal. It originates loans, primarily directly with
consumers purchasing or refinancing manufactured housing, recreational vehicles
and boats. To a lesser extent, Forward Financial originates real estate
mortgages near its headquarters for its own portfolio and for sale. Forward
Financial currently operates in twenty states from its headquarters in
Westborough, Massachusetts and an office in Las Vegas, Nevada. It sells the
vast majority of the consumer loans it originates to third-party client
lenders. Ellsmere Insurance Agency, Inc. was acquired in December 1999, and has
limited operations. It was originally a subsidiary of Broadway National and is
currently a subsidiary of Boston Federal, following the merger of Broadway
National and Boston Federal. It is incorporated under Massachusetts law and
holds a bank insurance broker license and a corporate broker license in
Massachusetts. It also holds a non-resident broker license in various states
where applicable to the conduct of business in these states. Personnel As of December 31, 2003, BostonFed had 365 authorized full-time employee
positions and 78 authorized part-time employee positions, for a total of
approximately 399 full time equivalents. The employees are not represented by
a collective bargaining unit and BostonFed considers its relationship with its
employees to be good. 16




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REGULATION AND SUPERVISION General BostonFed, as a savings and loan holding company, is required by federal
law to report to, and otherwise comply with, the rules and regulations of the
Office of Thrift Supervision (the OTS). Boston Federal is subject to
extensive regulation, examination and supervision by the OTS, as its primary
federal regulator, and the Federal Deposit Insurance Corporation (the FDIC),
as the deposit insurer. Boston Federal is a member of the Federal Home Loan
Bank system and, with respect to deposit insurance, of the Savings Association
Insurance Fund (SAIF) managed by the FDIC. Boston Federal also maintains
some deposits insured by the Bank Insurance Fund (BIF) of the FDIC through
its merger with Broadway National. Boston Federal must file reports with the
OTS and the FDIC concerning its activities and financial condition in addition
to obtaining regulatory approvals prior to entering into certain transactions
such as mergers with, or acquisitions of, other entities. The OTS and/or the
FDIC conduct periodic examinations to test Boston Federals safety and
soundness and compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the OTS, the FDIC or Congress,
could have a material adverse impact on BostonFed and/or Boston Federal and
their operations. Certain regulatory requirements applicable to BostonFed and
Boston Federal are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to depository institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on
BostonFed and Boston Federal. Ellsmere Insurance Agency, Inc. is regulated by the insurance regulatory
agencies in Massachusetts and in those states in which it holds non-resident
insurance agency licenses. Holding Company Regulation Federal Regulation.BostonFed is a nondiversified unitary savings and
loan holding company within the meaning of federal law. Under prior law, a
unitary savings and loan holding company, such as the Company, was not
generally restricted as to the types of business activities in which it may
engage, provided that Boston Federal continued to be a qualified thrift lender
(QTL). See Federal Savings Institution Regulations  QTL Test. The
Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of
a savings institution after May 4, 1999 unless it engages only in the financial
activities permitted for financial holding companies under the law or for
multiple savings and loan holding companies as described below. Further, the
Gramm-Leach-Bliley Act specifies that existing savings and loan holding
companies may only engage in such activities. The Gramm-Leach-Bliley Act,
however, grandfathered the unrestricted authority for activities with respect
to unitary savings and loan holding companies existing prior to May 4, 1999, so
long as the holding companys savings institution subsidiary continues to
comply with the QTL Test. The Company does not qualify for the grandfathering.
Upon any non-supervisory acquisition by the company of another savings
institution or savings bank that meets the QTL Test and is deemed to be a
savings institution by the OTS, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would generally be limited to activities permissible for bank
holding companies under Section 4(c)(8) of the Bank Holding Company Act,
subject to the prior approval of the OTS, and certain activities authorized by
OTS regulation. However, the OTS has issued an interpretation concluding that
multiple savings and loan holding companies may also engage in activities
permitted for financial holding companies. 17




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A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another bank, savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding
companies to acquire savings institutions, the OTS considers the financial and
managerial resources and future prospects of the Company and
institution involved, the effect of the acquisition on the risk to the deposit
insurance funds, the convenience and needs of the community and competitive
factors. The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions. Although savings and loan holding companies are not currently subject to
specific capital requirements or specific restrictions on the payment of
dividends or other capital distributions, federal regulations do prescribe such
restrictions on subsidiary savings institutions as described below. The Bank
must notify the OTS 30 days before declaring any dividend to the Company. In
addition, the financial impact of a holding company on its subsidiary
institution is a matter that is evaluated by the OTS and the agency has
authority to order cessation of activities or divestiture of subsidiaries
deemed to pose a threat to the safety and soundness of the institution. State Regulation.BostonFed is also a bank holding company within the
meaning of the Massachusetts bank holding company laws. The prior approval of
the Massachusetts Board of Bank Incorporation is required before BostonFed may
acquire all or substantially all of the assets of any depository institution
(or holding company thereof), merge with a holding company of a depository
institution or acquire more than 5% of the voting stock of a depository
institution or holding company thereof. Acquisition of the Holding Company Federal Regulation.Under the federal Change in Bank Control Act, a
notice must be submitted to the OTS if any person (including a company), or
group acting in concert, seeks to acquire control of a savings and loan
holding company. Under certain circumstances, a change of control may occur,
and prior notice is required, upon the acquisition of 10% or more of the
Companys outstanding voting stock, unless the OTS has found that the
acquisition will not result in a change of control of the Company. Under the
Change in Bank Control Act, the OTS has 60 days from the filing of a complete
notice to act, taking into consideration certain factors, including the
financial and managerial resources of the acquirer and the anti-trust effects
of the acquisition. Any company that acquires control would then be subject to
regulation as a savings and loan holding company. Federal Savings Institution Regulations Business Activities.The activities of federal savings banks are governed
by federal law and regulations. These laws and regulations delineate the
nature and extent of the activities in which federal savings banks may engage.
In particular, certain lending authority for federal savings banks, e.g.,
commercial, non-residential real property loans and consumer loans, is limited
to a specified percentage of the institutions capital or assets. 18




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Capital Requirements.The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS examination rating system) and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
ratio (3% for institutions receiving the highest rating on the CAMELS
examination rating system) and, together with the risk-based capital standard
itself, a 4% Tier I risk-based capital standard. The OTS regulations also
require that, in meeting the tangible, leverage and risk-based capital
standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank. The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core
capital and supplementary capital) to risk-weighted assets of at least 4% and
8%, respectively. In determining the amount of risk-weighted assets, all
assets, including certain off-balance sheet assets, recourse obligations, residual interests and
direct credit substitutes, are multiplied by a risk-weight factor of 0% to
100%, assigned by the OTS capital regulation based on the risks believed
inherent in the type of asset. Core (Tier 1) capital is defined as common
stockholders equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital. The capital regulations also incorporate an interest rate risk component.
Savings institutions with above normal interest rate risk exposure are
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. The OTS also has authority to establish individual minimum capital
requirements in appropriate cases upon a determination that an institutions
capital level is or may become inadequate in light of the particular
circumstances. At December 31, 2003, the Bank met each of the capital
requirements. 19




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##### Table of Contents



The following table presents Boston Federals capital position at December
31, 2003, relative to regulatory requirements. For CapitalAdequacy
    
    To Be WellActual
    
    Purposes
    
    CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)As of December 31, 2003Risk-based total capital
    
    $
    110,616
    
    
    
    10.7
    %
    
    $
    82,402
    
    
    
    8.0
    %
    
    $
    103,003
    
    
    
    10.0
    %Core capital
    
    
    97,728
    
    
    
    5.8
    
    
    
    66,919
    
    
    
    4.0
    
    
    
    83,649
    
    
    
    5.0Risk-based Tier I capital
    
    
    97,728
    
    
    
    9.5
    
    
    
    41,201
    
    
    
    4.0
    
    
    
    61,802
    
    
    
    6.0Tangible capital
    
    
    97,728
    
    
    
    5.8
    
    
    
    33,460
    
    
    
    2.0
    
    
    
    83,649
    
    
    
    5.0
 20




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##### Table of Contents



Prompt Corrective Regulatory Action.The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of
which depends upon the institutions degree of undercapitalization. Generally,
an institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
undercapitalized. A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be significantly undercapitalized and
an institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be critically undercapitalized. Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator within
specified time frames for an institution that is critically undercapitalized.
The regulation also provides that a capital restoration plan must be filed
with the OTS within 45 days of the date a savings institution receives notice
that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The OTS could also take any one of a
number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors. Insurance of Deposit Accounts.Deposits of Boston Federal are presently
insured by the FDIC through the SAIF and, to a lesser extent, the BIF, due to
the merger with Broadway National. The FDIC maintains a risk-based assessment
system by which institutions are assigned to one of three categories based on
their capitalization and one of three subcategories based on examination
ratings and other supervisory information. An institutions assessment rate
depends upon the categories to which it is assigned. Assessment rates for SAIF
and BIF member institutions are determined semi-annually by the FDIC and
currently range from zero basis points of assessable deposits for the
healthiest institutions to 27 basis points of assessable deposits for the
riskiest. Boston Federals FDIC assessment rate for fiscal 2003 was zero basis
points. A significant increase in FDIC insurance premiums would likely have an
adverse effect on the operating expenses and results of operations of
BostonFed. In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation (FICO) to recapitalize the predecessor to the SAIF. During
fiscal 2003, FICO payments for SAIF and BIF members approximated 1.60 basis
points of assessable deposits. The Banks assessment rate for the fiscal year 2003 was 1.60 basis points
and the total assessment paid for this period (including the FICO assessment)
was $173,000. The FDIC has authority to increase insurance assessments. A
significant increase in SAIF or BIF insurance premiums would likely have an
adverse effect on the operating expenses and results of operations of the Bank.
Management cannot predict what insurance assessment rates will be in the
future. Insurance of deposits may be terminated by the FDIC upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance. 21




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##### Table of Contents



Loans to One Borrower.Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. Savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
2003, Boston Federals regulatory limit on loans to one borrower was $16.6
million. At December 31, 2003, Boston Federals largest aggregate outstanding
balance of loans and outstanding commitments to one borrower was $9.1 million. QTL Test.Federal law requires savings institutions to meet a QTL Test.
Under the test, a savings association is required to either qualify as a
domestic building and loan association under the Internal Revenue Code or
maintain at least 65% of its portfolio assets (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
qualified thrift investments (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12-month period. A savings institution that fails the QTL Test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 2003, Boston Federal maintained approximately 90% of its portfolio
assets in qualified thrift investments and, therefore, met the QTL Test.
Recent legislation has expanded the extent to which education loans, credit
card loans and small business loans may be considered qualified thrift
investments. Limitation on Capital Distributions.OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. Under the regulations, an
application to and the prior approval of the OTS is required prior to any
capital distribution if the institution does not meet the criteria for
expedited treatment of applications under OTS regulations (i.e., generally,
examination and Community Reinvestment Act ratings in the two top categories),
the total capital distributions for the calendar year exceed net income for
that year plus the amount of retained net income for the preceding two years,
the institution would be undercapitalized following the distribution or the
distribution would otherwise be contrary to a statute, regulation or agreement
with the OTS. If an application is not required, the institution must still
provide prior notice to the OTS of the capital distribution if, like the Bank,
it is a subsidiary of a holding company. In the event Boston Federals capital
fell below its regulatory requirements or the OTS notified it that it was in
need of increased supervision, Boston Federals ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. Assessments.Savings institutions are required to pay assessments to the
OTS to fund the agencys operations. The general assessments, paid on a
semi-annual basis, are computed based upon the savings institutions total
assets, including consolidated subsidiaries, as reported in Boston Federals
applicable quarterly thrift financial report or Broadway Nationals call
report. The assessments paid by the Company
for the fiscal year ended December 31, 2003, totaled approximately $306,000
($247,000 paid to the OTS and $59,000 paid to the Office of the Comptroller of
the Currency (OCC)). Transactions with Related Parties.The Banks authority to engage in
transactions with affiliates (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the depository institution. The 22




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##### Table of Contents



aggregate amount of
covered transactions with all affiliates is limited to 20% of the depository
institutions capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described by
federal law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and under
circumstances that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to
any affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary. The Sarbanes-Oxley Act of 2002 generally prohibits loans by the company to
its executive officers and directors. However, that act contains a specific
exemption for loans by the Bank to its executive officers and directors in
compliance with federal banking laws. Under such laws, the Banks authority to
extend credit to executive officers, directors and 10% shareholders
(insiders), as well as entities such persons control, is limited. The law
limits both the individual and aggregate amount of loans the Bank may make to
insiders based, in part, on the Banks capital position and requires certain
board approval procedures to be followed. Board pre-approval was required for
all loans to executive officers and directors. Such loans are required to be
made on terms substantially the same as those offered to unaffiliated
individuals and do not involve more than the normal risk of repayment. There
is an exception for loans made pursuant to a benefit or compensation program
that is widely available to all employees of the institution and does not give
preference to insiders over other employees. Enforcement.The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order, to removal of officers and/or directors, to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day,
or even $1 million per day in especially egregious cases. Under the FDI Act,
the FDIC has the authority to recommend to the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations. Neither BostonFed nor Boston Federal is currently under any
enforcement action. Standards for Safety and Soundness.The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness
(Guidelines). The Guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. If the OTS
determines that an institution fails to meet any standard prescribed by the
Guidelines, the OTS may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. Federal Home Loan Bank System Boston Federal is a member of the Federal Home Loan Bank of Boston, one of
12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for stockholder member institutions. The
Bank, as a stockholder of the Federal Home Loan Bank, is required to acquire
and hold shares of capital stock in that Federal Home Loan Bank in an amount at
least equal to 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20
of its advances (borrowings) from the Federal Home Loan Bank,
whichever is greater. 23




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##### Table of Contents



Boston Federal was in compliance with this requirement
with an investment in Federal Home Loan Bank stock at December 31, 2003 of
$28.2 million. Recent legislation has changed the structure of the FHLBs funding
obligations, revised the capital structure of the FHLB and implemented entirely
voluntary membership in the FHLB. Management believes the effect of these
changes will not be material with respect to the Banks membership in the FHLB. The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements reduce the amount of dividends
that the Federal Home Loan Banks pay to their members and can also result in
the Federal Home Loan Banks imposing a higher rate of interest on advances to
their members. If dividends were reduced, or interest on future Federal Home
Loan Bank advances increased, the Banks net interest income would likely also
be reduced. Federal Reserve System The FRB regulations require savings institutions to maintain non-interest
earning reserves against their transaction accounts (primarily NOW and regular
checking accounts). The regulations generally provide that reserves be
maintained against aggregate transaction accounts as follows: a 3% reserve
ratio is assessed on net transaction accounts up to and including $45.4
million; a 10% reserve ratio is applied above $45.4 million. The first $6.6
million of otherwise reservable balances (subject to adjustments by the Federal
Reserve Board) are exempted from the reserve requirements. The amounts are
adjusted annually. The Bank complies with the foregoing requirements. Federal Securities Laws BostonFeds common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the Exchange Act). BostonFed is subject to
the information and proxy solicitation requirements, insider trading
restrictions and other requirements under the Exchange Act. Shares of the common stock purchased by persons who are not affiliates of
BostonFed may be resold without registration. Shares purchased by an affiliate
of BostonFed will be subject to the resale restrictions of Rule 144 under the
Securities Act of 1933, as amended (the Securities Act). If BostonFed meets
the current public information requirements of Rule 144 under the Securities
Act, each affiliate of BostonFed who complies with the other conditions of Rule
144 (including those that require the affiliates sale to be aggregated with
those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed in any three-month
period the greater of (i) 1% of the outstanding shares of BostonFed or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks. Provisions may be made in the future by BostonFed to permit
affiliates to have their shares registered for sale under the Securities Act
under certain circumstances. FEDERAL AND STATE TAXATION Federal Taxation General.BostonFed and the Bank report their federal income on a
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly Boston Federals reserve for bad debts
discussed below. The 24




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##### Table of Contents



following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or BostonFed. For its 2003 taxable year, BostonFed is
subject to a maximum federal income tax rate of 35%. Bad Debt Reserves.For tax years beginning prior to December 31, 1995,
thrift institutions were allowed to establish a reserve for bad debts and
deduct reasonable annual additions to their bad debt reserves. Annual
additions to bad debt reserves were calculated using either the experience
method or the percentage of taxable income method. Federal legislation
effective for tax years beginning after January 1,
1996, eliminated the percentage of taxable income method for all thrift
institutions and prohibited thrifts with assets in excess of $500 million from
using the reserve method of accounting for bad debts. Boston Federal is,
therefore, required to use the specific charge-off method of accounting for bad
debts, with loans deducted as they are charged off. In addition, thrifts were
required to recapture (i.e., take into income) the amounts added to their bad
debt reserves for tax years beginning after January 1, 1988. Thrift institutions required to change their accounting methods as a
result of federal legislation have been permitted to recapture accumulated bad
debt reserves ratably over a six-year period, starting with the tax year
beginning after December 31, 1995, with a two-year postponement available,
provided the institution met certain residential loan requirements. BostonFed
previously recorded a deferred tax liability equal to the bad debt recapture;
as a result, the recapture rules have not affected net income or income tax
expenses. Distributions.Under the 1996 Act, if Boston Federal makes non-dividend
distributions to BostonFed, such distributions will be considered to have been
made from Boston Federals unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and
then from its supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in Boston Federals income. Non-dividend
distributions include distributions in excess of Boston Federals current and
accumulated earnings and profits, as calculated for federal income tax
purposes, distributions in redemption of stock, and distributions in partial or
complete liquidation. Dividends paid out of Boston Federals current or
accumulated earnings and profits will not be so included in Boston Federals
income. The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if Boston Federal makes a non-dividend
distribution to BostonFed, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. Boston Federal does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserves. The
bad debt reserves subject to recapture amount to $13.3 million for which no
deferred taxes have been provided. State and Local Taxation Commonwealth of Massachusetts.Financial institutions are subject to a
tax on their apportioned income to Massachusetts at the rate of 10.50%.
BostonFeds bank subsidiary owns two security corporations and real estate
investment trusts (REITs). The security corporations, which do not qualify
as a bank holding company are taxed at 1.32%. The REITs pay no tax, provided
they distribute 100% of their income to their respective stockholders.
However, effective January 1, 2003, the stockholder recipient of REIT dividends
can no longer utilize the dividends received deduction when filing returns with
the Massachusetts Department of 25




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##### Table of Contents



Revenue. A subsidiary corporation of Boston
Federal conducting business in Massachusetts must file a separate Massachusetts
state tax return and is taxed as a financial institutions. Corporations which qualify as securities corporations, as defined by the
Massachusetts tax code, are taxed at a special rate of 0.33% of their gross
income if they qualify as a bank-holding company under the Massachusetts tax
code. BostonFed has applied for and received approval to be taxed at this
reduced tax rate as long as it is exclusively engaged in activities of a
securities corporation. BostonFed believes it will continue to qualify as a
securities corporation because a separate subsidiary was formed to make the
loan to Boston Federals Employee Stock Ownership Plan and BostonFeds other
activities qualify as activities permissible for a securities corporation. If
it were determined that BostonFed failed to so qualify, it would be taxed as a
financial institution at a rate of 10.50%. Delaware Taxation.As a Delaware holding company not earning income in
Delaware, BostonFed is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware. Other.Forward Financial and Ellsmere Insurance Agency, Inc. file state
tax returns in the various states where they operate in accordance with state
tax requirements. 
 Item 2. Properties. The Company conducts its business through Boston Federal which operates
through a home office in Burlington, Massachusetts and sixteen other offices.
BostonFed believes its current facilities are adequate to meet the present and
immediately foreseeable needs of BostonFed. Net Book Value ofOriginal
    
    
    
    Property orLeased
    
    Year
    
    Date of
    
    Leaseholdor
    
    Leased or
    
    Lease
    
    Improvements atLocation
    
    Owned
    
    Acquired
    
    Expiration
    
    December 31, 2003(Dollars in thousands)Administrative Branch/Home Office:17 New England Executive Park
Burlington, MA 01803
    
    Leased
    
    1988
    
    November, 2008
    
    $
    2,136Branch Offices:980 Massachusetts Avenue
Arlington, MA 02476
    
    Owned
    
    1976
    
    
    
    
    396880
Massachusetts Avenue(1)
Arlington, MA 02476
    
    Owned
    
    2003
    
    
    
    
    1,90560 The Great Road
Bedford, MA 01730
    
    Owned
    
    1971
    
    
    
    
    45921 Leonard Street
Belmont, MA 02478
    
    Leased
    
    2003
    
    May, 2007
    
    
    11449 Boston
Road(2)
Billerica, MA 01821
    
    Leased
    
    2000
    
    August, 2017
    
    
    1,631
 26




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##### Table of Contents



Net Book Value ofOriginal
    
    
    
    Property orLeased
    
    Year
    
    Date of
    
    Leaseholdor
    
    Leased or
    
    Lease
    
    Improvements atLocation
    
    Owned
    
    Acquired
    
    Expiration
    
    December 31, 2003(Dollars in thousands)75 Federal Street
Boston, MA 02110
    
    Leased
    
    1988
    
    August, 2008
    
    
    109457 Broadway
Chelsea, MA 02150
    
    Owned
    
    1969
    
    
    
    
    1,4301840 Massachusetts Avenue
Lexington, MA 02420
    
    Owned
    
    1960
    
    
    
    
    93341-49 Waltham
Street(3)
Lexington, MA 02421
    
    Owned
    
    2003
    
    
    
    
    2,2701013 Great Plain Avenue
Needham, MA 02492
    
    Leased
    
    2003
    
    July, 2007
    
    
    1701197 Centre Street
Newton Centre, MA 02459
    
    Owned
    
    2003
    
    
    
    
    1,80031 Cross Street
Peabody, MA 01960
    
    Owned
    
    1971
    
    
    
    
    394411 Broadway
Revere, MA 02151
    
    Owned
    
    1977
    
    
    
    
    710420 Boston Post Road
Sudbury, MA 01776
    
    Owned
    
    2003
    
    
    
    
    1,112200 Linden Street
Wellesley, MA 02482
    
    Leased
    
    1973
    
    June, 2004
    
    
    28999 Worcester Street
Wellesley, MA 02482
    
    Owned
    
    2003
    
    
    
    
    1,973280 Montvale Avenue
Woburn, MA 02476
    
    Owned
    
    2000
    
    
    
    
    1,514186 Cambridge Road
Suite 4
Woburn, MA 01801
    
    Leased
    
    2003
    
    October, 2007
    
    
    190Forward Financial Co.
112 Turnpike Road
Westborough, MA 01581
    
    Leased
    
    2003
    
    January, 2009
    
    
    265Total
    
    
    
    
    
    
    
    $
    19,539
   (1)
    
    Site under construction to replace the existing
Arlington, Massachusetts office.(2)
    
    Land is leased.(3)
    
    Sold in the first quarter of 2004. 27




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##### Table of Contents



Item 3. Legal Proceedings. BostonFed is not a party to any pending material legal proceedings other
than routine legal proceedings occurring in the ordinary course of business.
Such routine legal proceedings, in the aggregate, are believed by management to
be immaterial to BostonFeds financial condition or results of operations. 
 Item 4. Submission of Matters to a Vote of Security Holders. None. 28




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##### Table of Contents



PART II 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters. Information relating to the market for BostonFeds common equity and
related stockholder matters appearing under Shareholder Information in
BostonFeds 2003 Annual Report to Shareholders is incorporated herein by
reference. Information relating to dividend restrictions for BostonFeds
common stock appears under Regulation and Supervision. 
 Item 6. Selected Financial Data. Selected Financial Data in BostonFeds 2003 Annual Report to
Stockholders is incorporated herein by reference. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations. The Managements Discussion and Analysis of Financial Condition and
Results of Operation in BostonFeds 2003 Annual Report to Shareholders is
incorporated herein by reference. 
 Items 7A. Quantitative and Qualitative Disclosure About Market Risk. The above-captioned information is incorporated by reference to
Managements Discussion and Analysis of Financial Condition and Results of
Operations in BostonFeds 2003 Annual Report to Shareholders. 
 Item 8. Financial Statements and Supplementary Data. The required information is incorporated herein by reference to
BostonFeds 2003 Annual Report to Shareholders in the Consolidated Financial
Statements and the Notes thereto. 
 Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 
 Item 9A. 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 29




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##### Table of Contents



decisions regarding required
disclosure. In addition, based on that evaluation, no change in the Companys
internal control over financial reporting occurred during the year ended
December 31, 2003 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. 30




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##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of the Registrant. Information regarding directors and executive officers who are also
directors of BostonFed is incorporated herein by reference to BostonFeds Proxy
Statement for the Annual Meeting of Shareholders, to be filed with the SEC
pursuant to Regulation 14A not later than 120 days after the fiscal year
covered by this report. The Registrant has adopted a Financial Code of Ethics and a Whistleblower Policy. See Exhibits
14.1 and 14.2, respectively, to this Annual Report on Form 10-K. 
 Item 11. Executive Compensation. Information regarding executive compensation of directors and executive
officers is incorporated herein by reference to BostonFeds Proxy Statement for
the Annual Meeting of Shareholders, to be filed with the SEC pursuant to
Regulation 14A not later than 120 days after the fiscal year covered by this
report. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management. Information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to BostonFeds Proxy
Statement for the Annual Meeting of Shareholders, to be filed with the SEC
pursuant to Regulation 14A not later than 120 days after the fiscal year
covered by this report. 31




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##### Table of Contents



Equity Compensation Plan Information as of December 31, 2003 Plan category
    
    Number of
    
    Weighted-average
    
    Number ofsecurities to be
    
    exercise price of
    
    securitiesissued upon
    
    outstanding
    
    remaining availableexercise of
    
    options, warrants
    
    for future issuanceoutstanding
    
    and rights
    
    under equityoptions, warrants
    
    
    
    compensation plansand rights
    
    
    
    (excludingsecuritiesreflected in column(a))(a)
    
    (b)
    
    (c)Equity compensation plans approved by
security holders
    
    
    460,298
    
    
    $
    15.43
    
    
    
    24,000Equity compensation plans not approved by
security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    460,298
    
    
    $
    15.43
    
    
    
    24,000
 The Company does not maintain any equity compensation plans that have not
been approved by security holders. 
 Item 13. Certain Relationships and Related Transactions. Information relating to certain relationships and related transactions is
incorporated herein by reference to BostonFeds Proxy Statement for the Annual
Meeting of Shareholders, to be filed with the SEC pursuant to Regulation 14A
not later than 120 days after the fiscal year covered by this report. Item 14. Principal Accountant Fees and Expenses. The information required by this Item is incorporated herein by reference
to BostonFeds Proxy Statement for the Annual Meeting of Shareholders, to be
filed with the SEC pursuant to Regulation 14A not later than 120 days after the
fiscal year covered by this report. 
 
 PART IV 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) The following Consolidated Financial Statements of BostonFed,
included in BostonFeds Annual Report to Shareholders for the year ended
December 31, 2003, are incorporated by reference in Item 32




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8. The rest of the
information in the Annual Report is not deemed to be filed as part of this
Report, except as expressly provided below. PAGEIndependent Auditors Report
    
    
    F-1Consolidated Balance Sheets as of
December 31, 2003 and 2002
    
    
    F-2Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001
    
    
    F-3Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income
for the Years Ended December 31, 2003, 2002 and 2001
    
    
    F-4Consolidated Statements of Cash Flows for the Years
Ended December 31, 2003, 2002 and 2001
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
 The remaining information appearing in the Annual Report to Stockholder is
not deemed to be filed as part of this report, except as expressly provided
herein.  (2)
    
    All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated
financial statements or the notes thereto.(3)
    
    Exhibits  (a)
    
    The following exhibits are filed as part of this report.  3.1
    
    Restated Certificate of Incorporation of
BostonFed Bancorp, Inc. (1)3.2
    
    BostonFed Bancorp, Inc. Amended and Restated
Bylaws as of February 23, 2000 (2)4.0
    
    Stock Certificate of BostonFed Bancorp, Inc. (1)10.1
    
    Employment Agreement between Boston Federal and
David F. Holland and Employment Agreement between BostonFed
and David F. Holland (2)10.2
    
    Employment Agreement between Boston Federal and
David P. Conley and Employment Agreement between BostonFed
and David P. Conley (2)10.3
    
    Employment Agreement between Boston Federal and
John A. Simas and Employment Agreement between BostonFed and
John A. Simas (2)10.4
    
    Boston Federal Savings Bank Employee Severance Compensation Plan (1)10.5
    
    Employee Stock Ownership Plan and Trust (1)10.6
    
    BostonFed Bancorp, Inc. 1996 Stock-Based Incentive Plan (3)10.7
    
    BostonFed Bancorp, Inc. 1997 Stock Option Plan (4)10.8
    
    Boston Federal Savings Bank Defined Benefit Restoration Plan (2)10.9
    
    Boston Federal Savings Bank Defined Contribution Restoration Plan (2) 33




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10.10
    
    Employment Agreement Between Boston Federal
and John D. Mullen and Employment Agreement Between BostonFed
and John D. Mullen (5)10.11
    
    Employment Agreement Between Boston Federal
and Shaun W. McGee and Employment Agreement Between BostonFed
and Shaun W. McGee (5)11.0
    
    Computation of earnings per share (see
Consolidated Statements of Income located in the Annual
Report)13.0
    
    2003 Annual Report to Stockholders14.1
    
    Financial Code of Ethics14.2
    
    Whistleblower Policy21.0
    
    Subsidiaries of the Registrant23.0
    
    Consent of Independent Auditors31.1
    
    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 Certification of Chief Executive
Officer and Chief Financial Officer99.0
    
    Proxy Statement for the 2004 Annual Meeting to
be filed with the SEC pursuant to Regulation 14A not later
than 120 days after the fiscal year covered by this report   (1)
    
    Incorporated herein by reference into this document
from the Form S-1, Registration Statement, and any amendments
thereto, originally filed on July 21, 1995. Registration No.
333-94860.(2)
    
    Incorporated herein by reference into this document
from the Form 10-K filed on March 30, 2000.(3)
    
    Incorporated herein by reference into this document
from the Proxy Statement for the 1996 Annual Meeting of
Stockholders dated March 20, 1996.(4)
    
    Incorporated herein by reference into this document
from the Proxy Statement for the 1997 Annual Meeting of
Stockholders dated March 28, 1997.(5)
    
    Incorporated herein by reference into this document
from the Form 10-K filed on March 30, 2001.(b)
    
    Reports on Form 8-K.(1)
    
    October 8, 2003  Press release announcing
that Boston Federal received regulatory approval from the OTS
to purchase seven branch offices from Encore Bank.(2)
    
    October 17, 2003  Press release announcing
net income of $1.4 million for the quarter ended September
30, 2003.(3)
    
    October 28, 2003  Press release announcing
completion of the acquisition and assumption of seven branch
offices from Encore Bank.(4)
    
    November 13, 2003  Press release announcing
that President and CEO David F. Holland, will be speaking at
Sandler, ONeill & Partners Financial Services Conference in
November 13, 2003.(5)
    
    December 8, 2003  Press release announcing
that regulatory approval was granted from the OTS to merge
Broadway National with and into Boston Federal.(6)
    
    December 19, 2003  Amendment to Form 8-K
dated October 24, 2003 and filed on October 28, 2003. 34




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SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized. BOSTONFED BANCORP, INC.By:
    /s/ David F. HollandDavid F. HollandDATED:  March 15, 2004
    
    President, Chief Executive
Officer and
Chairman    of the Board Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated. Name
    
    Title
    
    Date/s/ David F. Holland
    
    President, Chief Executive Officer
    
    March 15, 2004and Chairman of the Board (PrincipalDavid F. Holland
    
    Executive Officer)/s/ David P. Conley
    
    Director, Executive Vice President,
    
    March 15, 2004Assistant Treasurer and AssistantDavid P. Conley
    
    Secretary/s/ John A. Simas
    
    Executive Vice President, Corporate
    
    March 15, 2004Secretary and Chief Financial OfficerJohn A. Simas
    
    (Principal financial and accounting officer)/s/ Richard J. Caturano
    
    Director
    
    March 15, 2004Richard J. Caturano/s/ Richard J. Fahey
    
    Director
    
    March 15, 2004Richard J. Fahey/s/ Patricia M. Flynn
    
    Director
    
    March 15, 2004Patricia M. Flynn/s/ Kija Kim
    
    Director
    
    March 15, 2004Kija Kim/s/ Joanna T. Lau
    
    Director
    
    March 15, 2004Joanna T. Lau/s/ W. Russell Scott, Jr.
    
    Director
    
    March 15, 2004W. Russell Scott, Jr./s/ Catherine Friend White
    
    Director
    
    March 15, 2004Catherine Friend White
 35