SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended June 30, 2002

OR

For the transition period from             to          

Commission file number 0-23695

Brookline Bancorp, Inc.

(Exact name of registrant as specified in its charter)

(617) 730-3500

(Registrant’s telephone number, including area code)

        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 requirement for the past 90 days.

YES  ý  NO  o

        Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date.

        Common stock, $0.01 par value - 58,651,222 shares outstanding as of August 6, 2002.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

FORM 10-Q

Index

Part I -  Financial Information

Item 1.   Financial Statements

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands except share data)

See accompanying notes to the unaudited consolidated financial statements.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands except share data)

See accompanying notes to the unaudited consolidated financial statements.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

See accompanying notes to the unaudited consolidated financial statements.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

Six months ended June 30, 2002 and 2001 (unaudited)

(Dollars in thousands)

(Continued)

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (Continued)

Six months ended June 30, 2002 and 2001 (unaudited)

(Dollars in thousands)

See accompanying notes to the unaudited consolidated financial statements.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Continued)

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows - (Continued)

(In thousands)

See accompanying notes to the unaudited consolidated financial statements.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Six months ended June 30, 2002 and 2001

(unaudited)

(1)       Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included. Results for the six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. Certain prior period amounts have been reclassified to conform to current period presentation.

The Company’s critical accounting policy relates to the allowance for loan losses. It is based on management’s estimate of probable known and inherent credit losses existing in the loan portfolio. The allowance is established through provisions for loan losses charged to income. Loans are charged off against the allowance when the collectibility of principal is unlikely. Recoveries of loans previously charged off are credited to the allowance.

In determining the level of the allowance for loan losses, management evaluates specific credits and the loan portfolio in general using several criteria that include historical performance, collateral values, cash flows and current economic conditions. The evaluation culminates with a judgment on the probability of collection of loans outstanding. Management’s methodology provides for three allowance components. The first component represents allowances established for specific identified loans. The second component represents allowances for groups of homogenous loans that currently exhibit no identified weaknesses and are evaluated on a collective basis. Allowances for groups of similar loans are established based on factors such as historical loss experience, the level and trends of loan delinquencies, and the level and trends of classified assets. The last component is an unallocated allowance based on evaluation of factors such as trends in the economy and real estate values in the areas where the Company lends money, concentrations in the amount of loans the Company has outstanding to large borrowers and concentrations in the type and geographic location of loan collateral. Determination of the unallocated allowance is a very subjective process. Management believes the unallocated allowance is an important component of the total allowance because it  (a) addresses the probable inherent risk of loss that exists in the Company’s loan portfolio (which is substantially comprised of loans with repayment terms extended over many years) and (b) helps to recognize the risk related to the margin of imprecision inherent in the estimation of the other two components of the allowance.

(2)       Corporate Structure and Stock Offerings (Dollars in Thousands)

Brookline Bancorp, Inc. (the “Company”) was organized in November 1997 for the purpose of acquiring all of the capital stock of Brookline Savings Bank (“Brookline”) upon completion of Brookline’s reorganization from a mutual savings bank into a mutual holding company structure. As part of the reorganization, the Company offered for sale 47% of the shares of its common stock. The remaining 53% of the Company’s shares of common stock were issued to Brookline Bancorp, MHC (the “MHC”). The reorganization and offering were completed on March 24, 1998. At June 30, 2002, the MHC owned 15,420,350 shares (57.5%) of the Company’s shares of common stock outstanding.

On July 16, 2001, the Office of Thrift Supervision (“OTS”) approved the conversion of the MHC, the Company, Brookline and Lighthouse Bank (“Lighthouse”) from state to federal charters. On April 4, 2002, the Boards of Directors of the MHC, the Company and Brookline adopted a Plan of Conversion and Reorganization to convert the MHC from mutual to stock form and to complete a related stock offering in which shares of common stock representing the MHC’s ownership interest in the Company would be sold to investors.

The Plan of Conversion and Reorganization was approved by the stockholders of the Company and the depositors of Brookline on June 27, 2002 and by the OTS on July 8, 2002. The reorganization and stock offering were completed on

July 9, 2002. As of that date, the Company sold 33,723,750 shares of common stock for $10.00 per share. After taking into consideration estimated related expenses of approximately $4,400, net proceeds from the stock offering amounted to approximately $332,837. An additional 24,888,478 shares were issued to existing stockholders based on an exchange rate of 2.186964 new shares of common stock for each existing share, resulting in 58,612,228 total new shares outstanding. Cash was paid in lieu of fractional shares.

Upon completion of the conversion and stock offering, (a) Brookline Bancorp Inc. changed from a federally-chartered holding company to a new Delaware holding company and (b) the MHC ceased to exist and its net assets of $8,457 were transferred into Brookline.

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The conversion was accounted for as a change in corporate form with no subsequent change in the historical basis of the Company’s assets, liabilities and equity.

(3)       Lighthouse Bank (Dollars in Thousands)

On April 12, 2000, the Company received regulatory approval for Lighthouse to commence operations as New England’s

first-chartered internet-only bank. In April 2001, the Company decided to pursue the sale of Lighthouse to a third party

or to merge it into Brookline. That decision was reached after determining the amount of additional operating losses Lighthouse would likely incur before achieving satisfactory profitability. On July 17, 2001, Lighthouse was merged into Brookline. A summary of Lighthouse operating expenses for the three months and six months ended June 30, 2001 is as follows:

Certain operating expenses associated with servicing former Lighthouse customers, including employee stay bonuses, were incurred through the third quarter of 2001. As of September 17, 2001, Lighthouse customers’ accounts were transferred to Brookline’s systems and records. In contemplation of the merger of Lighthouse into Brookline, a pre-tax restructuring charge of $3,912 was recorded in the second quarter of 2001 to provide for merger-related expenses. In the fourth quarter of 2001, $15 was provided for additional restructuring charges. Estimated expenses included in the restructuring charge and actual expenses incurred through June 30, 2002 were as follows:

At June 30, 2002, $132 is included in accrued expenses and other liabilities for the remainder of restructuring charges to be paid in 2002.

(4)       Business Segments (Dollars in Thousands)

Through July 17, 2001, the Company’s wholly-owned bank subsidiaries, Brookline and Lighthouse, collectively “the Banks”, were identified as reportable operating segments. The Brookline operating segment includes its wholly-owned subsidiaries. The “All Other” segment presented below includes the Company and its wholly-owned securities corporation.

The Company and the Banks follow generally accepted accounting principles as described in the summary of significant accounting policies. Income taxes are provided in accordance with tax allocation agreements between the Company and the Banks. Intercompany expenditures are allocated based on actual or estimated costs. Consolidation adjustments reflect elimination of intersegment revenue and expenses and balance sheet accounts.

The primary activities of the Banks through July 17, 2001 included acceptance of deposits from the general public, origination of mortgage loans on residential and commercial real estate, commercial and consumer loans, and investment in

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debt securities, mortgage-backed securities and other financial instruments. Brookline conducts its business primarily through its branch network while Lighthouse conducted its business primarily through the internet. As stated in note 3, Lighthouse was merged into Brookline on July 17, 2001. Since that date, management has evaluated the Company’s performance and allocated resources based on a single segment concept. Accordingly, there are no separately identified operating segments for which discrete financial information is available subsequent to July 17, 2001.

The following table sets forth certain information about and the reconciliation of reported net income for each of the reportable segments for the 2001 reporting periods.

(5)         Earnings Per Share

Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the periods presented. Diluted earnings per share gives effect to all dilutive potential shares resulting from options that were outstanding during the periods presented.

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The components of basic and diluted earnings per share for the three months and six months ended June 30, 2002 and 2001 are as follows:

(6)         Accumulated Other Comprehensive Income (Dollars in Thousands)

Accumulated other comprehensive income is comprised entirely of unrealized gains on securities available for sale, net of income taxes. At June 30, 2002 and December 31, 2001, such taxes amounted to $5,731 and $3,839, respectively.

(7)         Commitments and Swap Agreement (Dollars in Thousands)

At June 30, 2002, the Company had outstanding commitments to originate loans of $64,376, $48,869 of which were commercial real estate and multi-family mortgage loans. Unused lines of credit available to customers were $22,708, $13,480 of which were equity lines of credit.

The Bank entered into an interest-rate swap agreement with a third-party that matures April 14, 2005. The notional amount of the agreement is $5,000. Under this agreement, each quarter, the Bank pays interest on the notional amount at an annual fixed rate of 5.9375% and receives from the third-party interest on the notional amount at the floating three month U.S. dollar LIBOR rate. The Bank entered into this transaction to match more closely the repricing of its assets and liabilities and to reduce its exposure to increases in interest rates. The net interest expense paid for the three months and six months ended June 30, 2002 and 2001 was $51, $13, $101 and $14, respectively.

Effective January 1, 2001, the Company adopted SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities”. That Statement requires the Company to recognize all derivatives as either assets or liabilities in its balance sheet and to measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. The Company’s interest-rate swap agreement did not meet the criteria to designate it as a hedging instrument. Accordingly, changes in the fair value of the outstanding swap agreement are recognized as charges or credits to earnings. The pre-tax unrealized loss of $20 in the swap agreement as of

January 1, 2001 was not accounted for as the effect of a change in accounting principle due to immateriality. Instead, that amount was included in the pre-tax charge to earnings of $142 for the three months ended March 31, 2001 resulting from accounting for the swap agreement on a fair value basis. For the three months ended March 31, 2002, $53 was credited to pre-tax earnings and, for the three months ended June 30, 2002 and 2001, $117 was charged and $53 was credited,  respectively, to pre-tax earnings.

(8)         Dividend Declaration

On July 31, 2002, the Board of Directors of the Company approved and declared a regular quarterly cash dividend of $0.085 per share of common stock to shareholders of record as of July 31, 2002 and payable on August 15, 2002.

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(9)         1999 Stock Option Plan and 1999 Recognition and

              Retention Plan (Dollars in Thousands Except Per Share Amounts)

Under the Company’s 1999 Stock Option Plan (the “Stock Option Plan”), 1,367,465 shares of the Company’s common stock were reserved for issuance to officers, employees and non-employee directors of the Company. Shares issued upon the exercise of a stock option may be either authorized but unissued shares or reacquired shares held by the Company as treasury shares. Any shares subject to an award which expires or is terminated unexercised will again be available for issuance under the Stock Option Plan. On April 19, 1999, 1,265,500 options were awarded to officers and non-employee directors of the Company at an exercise price of $10.8125 per share, the fair market value of the common stock of the Company on that date. Options awarded vest over periods ranging from less than six months through five years. Activity under the Stock Option Plan for the six months ended June 30, 2002 was as follows:

Under the 1999 Recognition and Retention Plan (the “RRP”), 546,986 shares of the Company’s common stock were reserved for issuance as restricted stock awards to officers, employees and non-employee directors in recognition of prior service and as an incentive for such individuals to remain with the Company. Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company as treasury shares. Any shares not issued because vesting requirements are not met will again be available for issuance under the RRP. On April 19, 1999, 546,500 shares were awarded to officers and non-employee directors of the Company. As of June 30, 2002, 460,562 shares had vested and 8,068 shares had been forfeited. Expense is recognized for shares awarded over the vesting period at the fair market value of the shares on the date they were awarded, or $10.8125 per share. Expense for the six months ended June 30, 2002 and 2001 was $81 and $83, respectively.

(10)       Employee Stock Ownership Plan (Dollars in Thousands)

Brookline has an employee stock ownership plan (the “ESOP”). All Brookline employees meeting age and service requirements are eligible to participate in the ESOP. The ESOP purchased in the open market all of the 546,986 shares it was authorized to purchase at an aggregate cost of $6,598. The purchase of the shares was financed by a loan from the Company that is payable in quarterly installments over 30 years and bears interest at 8.50% per annum. The loan can be prepaid without penalty. Loan payments are principally funded by cash contributions from Brookline and dividends on unallocated shares of Company stock held by the ESOP, subject to IRS limitations.

For the six months ended June 30, 2002 and 2001, compensation and employee benefits expense was charged $300 and $244, based on the commitment to release 14,562 and 18,042 shares, respectively, to eligible employees.

(11)       Pension Benefits (in Thousands)

On July 6, 2000, the Board of Directors of Brookline voted to terminate, effective September 30, 2000, Brookline’s defined benefit pension plan, a non-contributory qualified retirement plan for eligible employees (the “Plan”). In connection with the termination of the Plan, eligible employees were offered a single sum settlement equal to the value of their benefits under the Plan. In addition, a portion of the surplus of the Plan was used to enhance the benefits of eligible employees. Final Plan termination was approved by the Internal Revenue Service and, as a result, a gain of $3,667 ($1,890 on an after-income tax basis) was recognized during the three months ended June 30, 2001.

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Brookline established a defined contribution plan so that, effective January 1, 2001, it contributes an amount equal to 5% of the compensation of eligible employees up to the limit established by law. The total amounts charged to earnings related to the new pension plan for the six months ended June 30, 2002 and 2001 were $114 and $141, respectively.

(12)       Income Taxes (Dollars in Thousands)

160 Associates, Inc. (“Associates”), a wholly-owned subsidiary of Brookline, owns 99.9% of Brookline Preferred Capital Corporation (“BPCC”), a real estate investment trust that owns and manages real estate mortgage loans originated by Brookline. Associates has received from the Commonwealth of Massachusetts Department of Revenue (“DOR”) a Notice of Intent to Assess additional state excise taxes of $3,923 plus interest and penalties. As of the date of the Notice, June 2, 2002, interest and penalties amounted to $803. The assessment is based on a desk review of the financial institution excise returns filed by Associates for its tax years ended December 31, 1999 and December 31, 2000. The 2001 tax return had not yet been filed by Associates as of the time of the DOR desk review. Assessed amounts ultimately paid, if any, would be deductible expenses for federal income tax purposes.

The DOR contends that dividend distributions by BPCC to Associates are fully taxable in Massachusetts. Associates believes that the Massachusetts statute that provides for a dividend received deduction equal to 95% of certain dividend distributions applies to the distribution made by BPCC to Associates. Accordingly, no provision has been made in the Company’s financial statements for the amounts assessed or additional amounts that might be assessed in the future. Associates intends to vigorously appeal the assessment and to pursue all available means to defend its position.

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Item 2.   Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Forward-Looking Statements

This quarterly report on form 10-Q contains statements about future events that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company’s actual results to differ materially from those contemplated by such forward-looking statements. These important factors include, but are not limited to, general economic conditions, changes in interest rates, regulatory considerations, competition, technological developments, retention and recruitment of qualified personnel and market acceptance of the Company’s pricing, products and services.

Corporate Structure and Stock Offering

As more fully explained in note 2 of the notes to the unaudited consolidated financial statements on page 8 herein, Brookline Bancorp, MHC (the “MHC”), Brookline Bancorp, Inc. (the “Company”) and Brookline Savings Bank (“Brookline”) completed a Plan of Conversion and Reorganization (the “Plan”) on July 9, 2002. As part of the Plan, shares of common stock representing the MHC’s ownership in the Company were sold to investors in a stock offering of 33,723,750 shares at a price of $10.00 per share. Net proceeds of the stock offering were approximately $332.8 million. An additional 24,888,478 shares were issued to existing stockholders based on an exchange rate of 2.186964 new shares of common stock for each existing share, resulting in 58,612,228  total new shares outstanding. Cash was paid in lieu of fractional shares.

Upon completion of the Plan, the Company was transformed into a holding company incorporated in Delaware and the MHC ceased to exist and its net assets of $8.5 million were transferred into Brookline.

Conversion to a Federal Charter

On February 21, 2001, the Board of Directors approved a plan to convert the Company’s charter from a Massachusetts corporation regulated by the Massachusetts Division of Banks and the Board of Governors of the Federal Reserve System to a federal corporation regulated by the Office of Thrift Supervision (“OTS”). The charter conversion, which was approved by the stockholders of the Company on April 19, 2001, was approved by the OTS on July 16, 2001. The MHC, Brookline and Lighthouse Bank (“Lighthouse”) also received approval of their conversions from state to federal charters on that date.

Among other things, the charter conversion permitted the MHC to waive the receipt of dividends paid by the Company without causing dilution to the ownership interests of the Company’s minority stockholders upon conversion of the MHC to stock form.

As part of the approval of the charter conversions, the OTS requires that the Company comply satisfactorily with several conditions, the most notable of which is that Brookline and its subsidiaries must divest themselves of their investment in marketable equity securities without material loss at the earliest possible date, but in any event no later than July 17, 2003. The divestiture can be accomplished by sale of the equity securities or their transfer to the Company or its subsidiary. At June 30, 2002, Brookline and its subsidiaries owned equity securities with a market value of $5.4 million.

As a federally-chartered institution, Brookline will be required to meet a qualified thrift lender test. Under that test, an institution 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 minus goodwill and other intangible assets, office property and specified liquid assets up to 20% of total assets) in certain “qualified thrift investments” (primarily loans to purchase, refinance, construct, improve or repair domestic residential housing, home equity loans, securities backed by or representing an interest in mortgages on domestic residential housing, and Federal Home Loan Bank stock) in at least nine months out of each twelve month period. A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. The OTS has granted Brookline an exception from the qualified thrift lender test through July 17, 2002. At June 30, 2002, Brookline maintained approximately 55.9% of its portfolio assets in qualified thrift investments. This percent was affected adversely by receipt of the proceeds from the stock offering that was completed on July 9, 2002, all of which were invested in short-term liquid investments. After completion of the offering, excess subscription proceeds were returned to stock subscribers and 50% of the net proceeds from the stock offering were transferred to the Company. Had these events taken place on June 30, 2002 instead of in July 2002, Brookline’s qualified thrift investment ratio would have been 65.3%.

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Lighthouse Bank

On April 12, 2000, the Company received regulatory approval for Lighthouse to commence operations as New England’s

first-chartered internet-only bank. In April 2001, the Company announced the decision to either sell Lighthouse to a third party or

merge it into Brookline. That decision had been reached after determining the amount of additional operating losses Lighthouse would likely incur before achieving satisfactory profitability. On July 17, 2001, the existence of Lighthouse as a separate corporate entity was terminated by its merger into Brookline. Brookline has continued to provide on-line electronic banking services to the former customers of Lighthouse. See notes 3 and 4 of the notes to the unaudited consolidated financial statements on pages 9 and 10 herein for information about the operating results of Lighthouse.

Comparison of Financial Condition at June 30, 2002 and December 31, 2001

Total assets increased $415.8 million, or 37.8%, from $1.100 billion at December 31,2001 to $1.515 billion at June 30, 2002. The increase was attributable primarily to a stock offering that commenced in the second quarter of 2002 and was completed on July 9, 2002.

The maximum number of shares available for sale in the stock offering was 33,723,750 shares at $10.00 per share. Eligible depositors and other parties subscribed for shares in excess of 33,723,750 by either submitting funds to Brookline or designating that payment for the subscribed shares be withdrawn from deposit accounts at Brookline. At June 30, 2002, Brookline had received $351.9 million in stock offering subscription proceeds, exclusive of funds added to deposit accounts earmarked for purchase of stock. Upon completion of the stock offering on July 9, 2002, $29.3 million was deducted from deposit accounts as payment for subscribed shares and $44.1 million was refunded to subscribers who were not eligible to receive their desired allotment of stock. After taking into consideration estimated related expenses of $4.4 million, net proceeds from the stock offering amounted to approximately $332.8 million. Half of that amount was added to stockholders’ equity of the Company and half was added to stockholders’ equity of Brookline.

Until completion of the stock offering, subscription proceeds were placed in investments with very short maturities. For the past several months, yields offered on quality investments have been declining. In light of this trend and uncertainty about the future direction of interest rates, the Company plans to invest the proceeds from the stock offering only in high quality investments with relatively short maturities. The Company believes that the purchase of higher-yielding fixed rate investments with longer maturities at this time would not be prudent. While short-term earnings might be enhanced by purchasing investments with those characteristics, longer-term earnings would suffer if interest rates were to rise from current levels.

Yields earned on the investments described in the preceding paragraph are expected to be lower than the assumed interest rate of 4.76% (3.05% on an after-tax basis) stated in the Pro Forma Data section of the prospectus for the recently completed stock offering. Net earnings will likely be lower than anticipated until interest rates rise.

Securities available for sale increased from $163.4 million at December 31, 2001 to $223.3 million at June 30, 2002. Funds derived from deposit growth were used primarily to purchase investments in light of the lack of loan growth during the first half of 2002. Purchases were concentrated in U.S. agency obligations with maturities in the two year range and collateralized mortgage obligations classified as “PAC-1-1” securities.

The unrealized gain on securities available for sale increased from $10.6 million ($6.7 million on an after-tax basis) at December 31, 2001 to $15.7 million ($10.0 million on an after-tax basis) at June 30, 2002. Much of the increase was attributable to the Company’s ownership of 349,748 shares of Medford Bancorp, Inc., a Massachusetts bank that announced in June that it had agreed to be acquired at a price of $35.00 per share. The Company acquired its shares at a cost of $5.3 million; the market value of the shares was $12.2 million at June 30, 2002 ($34.83 per share). The unrealized after-tax gain of $4.4 million included in stockholders’ equity at June 30, 2002 will be included in net income when the acquisition transaction is completed (currently expected in the fourth quarter of 2002).

Excluding money market loan participations, the loan portfolio declined 1.1% from $828.4 million at December 31, 2001 to $819.0 million at June 30, 2002. The decline was caused by the pay-off of a $10.0 million commercial loan which the Company elected not to renew because of the low interest rate associated with the loan. Additionally, loan prepayments and refinancings were at a higher than normal level as the declining interest rate environment prompted borrowers to seek loans at lower fixed rates of interest for the future.

Total deposits were $671.8 million at June 30, 2002 compared to $620.9 million at December 31, 2001, an increase of $50.9 million, or 8.2%. Part of the growth was attributable to the recently completed stock offering. As mentioned in the second paragraph of this section, $29.3 million was withdrawn from deposit accounts upon completion of the stock offering on July 9, 2002.

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Total stockholders’ equity increased from $285.4 million at December 31, 2001 to $296.4 million at June 30, 2002 primarily as a result of net earnings of $10.6 million for the six month period, net of cash dividends paid to stockholders of $3.5 million, and a $3.2 million after-tax increase in unrealized gains on securities available for sale. During the six month period, 33,594 options were exercised resulting in capital proceeds of $264,000. No shares of the Company’s common stock were repurchased during the six month period.

Non-Performing Assets and Allowance for Loan Losses

The following table sets forth information regarding non-performing assets and the allowance for loan losses:

In addition to identifying non-performing loans, the Company identifies loans that are characterized as “impaired” pursuant to generally accepted accounting principles. The definition of “impaired loans” is not the same as the definition of “non-accrual loans”, although the two categories tend to overlap. Impaired loans (excluding non-accrual loans) amounted to $53,000 at June 30, 2002 and $105,000 at December 31, 2001. None of the impaired loans at those dates required a specific allowance for impairment due primarily to prior charge-offs and the sufficiency of collateral values.

During the six months ended June 30, 2002 and 2001, recoveries of loans previously charged off amounted to $24,000 and $8,000, respectively, and loan charge-offs were $11,000 and none, respectively. The Company decreased its allowance for loan losses by crediting $100,000 to earnings in the six months ended June 30, 2002 and increased its allowance for loan losses by charging $659,000 to earnings in the six months ended June 30, 2001. The credit to earnings in the 2002 six month period was attributable to the $9.4 million decline in loans outstanding and net loan recoveries during that time. The charge to earnings in the 2001 six month period was attributable to growth in loans outstanding during that time. While management believes, that based on information currently available, the allowance for loan losses is sufficient to cover losses inherent in the Company’s loan portfolio at this time, no assurance can be given that the level of allowance will be sufficient to cover future loan losses or that future adjustments to the allowance will not be necessary if economic and/or other conditions differ substantially from the economic and other conditions considered by management in evaluating the adequacy of the current level of the allowance.

In the second quarter of 2001, the Company charged earnings $495,000 to recognize an other than temporary impairment in the carrying value of a $2.0 million bond issued by Southern California Edison that matured on June 1, 2001. Interest of $65,000 due on the bond was received at the maturity date and applied as a reduction of the carrying value of the bond instead of being credited to interest income. An interest payment of $65,000 received on December 1, 2001 was credited to income. On March 1, 2002, principal and interest due on the bond was paid in full resulting in a credit to income of $592,500 in the first quarter of 2002 ($495,000 to gain on repayment of securities and $97,500 to interest income).

Comparison of Operating Results for the Three Months Ended June 30, 2002 and 2001

General

Operating results are primarily dependent on the Company’s net interest income, which is the difference between interest earned on the Company’s loan and investment portfolio and interest paid on deposits and borrowings. Operating results are also affected by provisions for loan losses, the level of income from non-interest sources such as service fees and sales of investment securities, operating expenses and income taxes. Operating results are also affected significantly by general economic conditions, particularly changes in interest rates, as well as governmental policies and actions of regulatory authorities.

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Net income was $5.1 million, or $0.19 per share, for the three months ended June 30, 2002 compared to $3.4 million, or $0.13 per share, for the three months ended June 30, 2001. Basic and diluted earnings per share were the same in each of the quarterly periods. The 2002 and 2001 quarters included, on an after-tax basis, securities gains (losses) of $200,000 ($0.01 per share) and ($318,000) ($0.01 per share), respectively. The 2001 loss resulted from a write-down in the carrying value of a defaulted corporate bond. In the first quarter of 2002, the bond was paid in full and resulted in a recovery of the amount previously charged to earnings. The 2001 quarter also included an after-tax operating loss of $488,000 ($0.02 per share) related to the activities of Lighthouse. An after-tax restructuring charge of $2.3 million ($0.08 per share) was recorded in the second quarter of 2001 in contemplation of the merger of Lighthouse into Brookline. That charge was partially offset by an after-tax credit of $1.9 million ($0.07 per share) resulting from termination of Brookline’s defined benefit pension plan. That plan was replaced by a defined contribution plan.

Average Balance Sheets and Interest Rates

The following table sets forth information relating to the Company for the three months ended June 30, 2002 and 2001. The average yields and costs were derived by dividing interest income or interest expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods shown. Average balances were derived from daily average balances. The yields and costs included fees which are considered adjustments to yields.