Brookline Bancorp - 10-Q quarterly report FY

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

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

For the transition period from to

Commission file number 0-23695

Brookline Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Delaware		04-3402944
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

160 Washington Street, Brookline, MA		02447-0469
(Address of principal executive offices)		(Zip Code)

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

YES ý NO o

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).

YES o NO ý

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 – 61,584,691 shares outstanding as of November 7, 2005.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

FORM 10-Q

Index

		Page
Part I	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004	1

	Consolidated Statements of Income for the three months and nine months ended September 30, 2005 and 2004	2

	Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2005 and 2004	3

	Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2005 and 2004	4

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004	6

	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures about Market Risks	24

Item 4.	Controls and Procedures	24

Part II	Other Information

Item 1.	Legal Proceedings	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3.	Defaults Upon Senior Securities	25

Item 4.	Submission of Matters to a Vote of Security Holders	25

Item 5.	Other Information	25

Item 6.	Exhibits	25

	Signatures	26

Part I - Financial Information

Item 1. Financial Statements

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands except share data)

	September 30,			December 31,
	2005			2004
	(unaudited)
ASSETS
Cash and due from banks	$	16,004		$	8,937
Short-term investments	133,707			127,928
Securities available for sale	349,813			260,852
Securities held to maturity (market value of $857 and $914, respectively)	841			889
Restricted equity securities	23,081			17,444
Loans	1,620,090			1,269,637
Allowance for loan losses	(21,900		)	(17,540		)
Net loans	1,598,190			1,252,097
Other investment	4,545			4,456
Accrued interest receivable	8,609			5,801
Bank premises and equipment, net	11,198			3,900
Other real estate owned	1,150			—
Deferred tax asset	9,486			9,980
Prepaid income taxes	1,813			270
Core deposit intangible	10,064			—
Goodwill	35,615			—
Other assets	2,972			1,945
Total assets	$	2,207,088		$	1,694,499

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	1,153,854		$	773,958
Borrowed funds	421,896			320,171
Subordinated debt	12,249			—
Mortgagors’ escrow accounts	5,465			4,464
Accrued expenses and other liabilities	12,118			10,893
Total liabilities	1,605,582			1,109,486

Stockholders’ equity:
Preferred stock, $0.01 par value; 50,000,000 shares authorized; none issued	—			—
Common stock, $0.01 par value; 200,000,000 shares authorized; 62,989,384 shares and 60,477,939 shares issued, respectively	630			605
Additional paid-in capital	512,163			471,799
Retained earnings, partially restricted	120,620			144,081
Accumulated other comprehensive income (loss)	(1,158		)	560
Treasury stock, at cost – 1,404,693 shares and 1,335,299 shares, respectively	(18,144		)	(17,017		)
Unearned compensation - recognition and retention plans	(8,779		)	(10,963		)
Unallocated common stock held by ESOP – 701,623shares and 743,221 shares, respectively	(3,826		)	(4,052		)
Total stockholders’ equity	601,506			585,013

Total liabilities and stockholders’ equity	$	2,207,088		$	1,694,499

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands except share data)

	Three months ended				Nine months ended
	September 30,				September 30,
	2005		2004		2005		2004
	(unaudited)
Interest income:
Loans	$	22,830	$	16,081	$	66,908	$	46,646
Debt securities	2,876		1,427		7,787		4,874
Marketable equity securities	78		65		228		213
Restricted equity securities	241		139		699		280
Short-term investments	1,259		401		3,115		1,004
Total interest income	27,284		18,113		78,737		53,017

Interest expense:
Deposits	6,159		2,975		16,071		8,504
Borrowed funds	3,994		2,477		11,048		6,790
Subordinated debt	182		—		485		—
Total interest expense	10,335		5,452		27,604		15,294
Net interest income	16,949		12,661		51,133		37,723
Provision for loan losses	32		635		1,643		1,676
Net interest income after provision for loan losses	16,917		12,026		49,490		36,047

Non-interest income:
Fees and charges	798		496		2,851		2,166
Gains on securities, net	—		806		853		1,767
Swap agreement market valuation credit	—		50		49		178
Other income	130		142		371		493
Total non-interest income	928		1,494		4,124		4,604

Non-interest expense:
Compensation and employee benefits	3,332		2,477		9,889		7,549
Recognition and retention plans	668		722		2,040		2,168
Occupancy	721		399		2,111		1,189
Equipment and data processing	1,361		1,164		4,547		3,249
Advertising and marketing	352		113		807		490
Dividend equivalent rights	339		359		702		734
Merger/conversion	1		—		894		—
Amortization of core deposit intangible	593		—		1,778		—
Other	1,263		625		3,156		1,866
Total non-interest expense	8,630		5,859		25,924		17,245

Income before income taxes	9,215		7,661		27,690		23,406
Provision for income taxes	3,694		3,164		11,196		9,635
Net income	$	5,521	$	4,497	$	16,494	$	13,771

Earnings per common share:
Basic	$	0.09	$	0.08	$	0.27	$	0.24
Diluted	0.09		0.08		0.27		0.24

Weighted average common shares outstanding during the period:
Basic	60,108,206		57,373,970		60,026,232		57,229,259
Diluted	60,948,961		58,144,811		60,830,950		58,082,856

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

	Three months ended						Nine months ended
	September 30,						September 30,
	2005			2004			2005			2004
	(unaudited)

Net income	$	5,521		$	4,497		$	16,494		$	13,771

Other comprehensive income, net of taxes:
Unrealized holding gains (losses)	(1,377		)	362			(1,855		)	(1,059		)
Income tax (charge) benefit	506			(130		)	684			380
Net unrealized holding gains (losses)	(871		)	232			(1,171		)	(679		)

Less reclassification adjustment for gains included in net income:
Realized gains	—			806			853			1,767
Income tax expense	—			289			306			634
Net reclassification adjustment	—			517			547			1,133

Net other comprehensive loss	(871		)	(285		)	(1,718		)	(1,812		)

Comprehensive income	$	4,650		$	4,212		$	14,776		$	11,959

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

Nine months ended September 30, 2005 and 2004 (unaudited)

(In thousands except share data)

	Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income			Treasury stock			Unearned compensation- recognition and retention plans			Unallocated common stock held by ESOP			Total stockholders’ equity
Balance at December 31, 2003	$	602	$	469,493		$	169,417		$	2,529		$	(17,017	)	$	(13,960	)	$	(4,380	)	$	606,684

Net income	—		—			13,771			—			—			—			—			13,771

Unrealized loss on securities available for sale, net of reclassification adjustment	—		—			—			(1,812		)	—			—			—			(1,812		)

Common stock dividends of $0.655 per share	—		—			(38,211		)	—			—			—			—			(38,211		)

Proceeds from exercise of stock options (319,623 shares)	3		1,577			—			—			—			—			—			1,580

Income tax benefit from exercise of non-incentive stock options	—		72			—			—			—			—			—			72

Recognition and retention shares forfeited	—		(107		)	—			—			—			107			—			—

Income tax benefit related to recognition and retention plan shares	—		115			—			—			—			—			—			115

Compensation under recognition and retention plans	—		—			—			—			—			2,168			—			2,168

Common stock held by ESOP committed to be released (45,099 shares)	—		430			—			—			—			—			246			676

Balance at September 30, 2004	$	605	$	471,580		$	144,977		$	717		$	(17,017	)	$	(11,685	)	$	(4,134	)	$	585,043

	Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Treasury stock			Unearned compensation- recognition and retention plans			Unallocated common stock held by ESOP			Total stockholders’ equity
Balance at December 31, 2004	$	605	$	471,799		$	144,081		$	560		$	(17,017	)	$	(10,963	)	$	(4,052	)	$	585,013

Net income	—		—			16,494			—			—			—			—			16,494

Unrealized loss on securities available for sale, net of reclassification adjustment	—		—			—			(1,718		)	—			—			—			(1,718		)

Common stock dividends of $0.655 per share	—		—			(39,955		)	—			—			—			—			(39,955		)

Exercise of stock options (4,520 shares)	—		23			—			—			—			—			—			23

2,516,525 shares issued for the acquisition of Mystic Financial, Inc.	25		39,157			—			—			—			—			—			39,182

Shares obtained through the acquisition of Mystic Financial, Inc. (69,484 shares)	—		—			—			—			(1,127		)	—			—			(1,127		)

Income tax benefit related to RRP shares, dividends paid to ESOP participants and exercise of stock options	—		907			—			—			—			—			—			907

Recognition and retention shares forfeited	—		(144		)	—			—			—			144			—			—

Compensation under recognition and retention plans	—		—			—			—			—			2,040			—			2,040

Common stock held by ESOP committed to be released (41,598 shares)	—		421			—			—			—			—			226			647

Balance at September 30, 2005	$	630	$	512,163		$	120,620		$	(1,158	)	$	(18,144	)	$	(8,779	)	$	(3,826	)	$	601,506

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

	Nine months ended September 30,
	2005			2004
	(unaudited)

Cash flows from operating activities:
Net income	$	16,494		$	13,771
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,643			1,676
Compensation under recognition and retention plans	2,040			2,168
Release of ESOP shares	647			676
Depreciation and amortization	1,159			522
Amortization, net of accretion, of securities premiums and discounts	1,671			2,989
Amortization of deferred loan origination costs	4,536			3,514
Amortization of core deposit intangible	1,778			—
Accretion of acquisition fair value adjustments	(1,377		)	—
Amortization of mortgage servicing rights	51			—
Gains from sales of securities	(853		)	(1,767		)
Equity interest in earnings of other investment	(328		)	(473		)
Swap agreement market valuation credit	(49		)	(178		)
Write-down of other real estate owned	250			—
Income tax benefit from exercise of non-incentive stock options, recognition and retention plan shares and dividends paid to ESOP participants	907			187
Deferred income taxes	(839		)	133
(Increase) decrease in:
Accrued interest receivable	(1,413		)	(340		)
Prepaid income taxes	1,552			(59		)
Other assets	2,361			(561		)
Increase (decrease) in:
Income taxes payable	—			(1,489		)
Accrued expenses and other liabilities	519			1,779
Net cash provided from operating activities	30,749			22,548

Cash flows from investing activities:
Proceeds from sales of securities available for sale	9,769			2,132
Proceeds from redemptions and maturities of securities available for sale	164,896			96,674
Proceeds from redemptions and maturities of securities held to maturity	48			144
Purchase of securities available for sale	(201,790		)	(85,334		)
Purchase of Federal Home Loan Bank of Boston stock	(1,415		)	(5,153		)
Net increase in loans	(41,375		)	(165,410		)
Proceeds from sales of participations in loans	29,438			—
Purchase of bank premises and equipment	(861		)	(895		)
Acquisition, net of cash and cash equivalents acquired	(13,006		)	—
Distribution from other investment	239			271
Net cash used for investing activities	(54,057		)	(157,571		)

	Nine months ended September 30,
	2005			2004
	(unaudited)

Cash flows from financing activities:
Increase (decrease) in demand deposits and NOW, savings and money market savings accounts	$	(96,310	)	$	29,083
Increase in certificates of deposit	144,520			26,302
Proceeds from Federal Home Loan Bank of Boston advances	581,600			489,700
Repayment of Federal Home Loan Bank of Boston advances	(553,543		)	(404,729		)
Increase (decrease) in mortgagors’ escrow accounts	(181		)	413
Proceeds from exercise of stock options	23			1,580
Payment of dividends on common stock	(39,955		)	(38,211		)
Net cash provided from financing activities	36,154			104,138

Net increase (decrease) in cash and cash equivalents	12,846			(30,885		)
Cash and cash equivalents at beginning of period	136,865			144,703
Cash and cash equivalents at end of period	$	149,711		$	113,818

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits, borrowed funds and subordinated debt	$	27,548		$	15,130
Income taxes	9,392			10,862

Acquisition of Mystic Financial, Inc.:
Assets acquired (excluding cash and cash equivalents)	$	471,412		$	—
Liabilities assumed	420,351			—

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Nine months ended September 30, 2005 and 2004

(unaudited)

(1) Basis of Presentation (Dollars in thousands except per share amounts)

The consolidated financial statements include the accounts of Brookline Bancorp, Inc. (the “Company”) and its wholly owned subsidiaries, Brookline Bank (“Brookline”) and Brookline Securities Corp. Brookline includes its wholly owned subsidiary, BBS Investment Corporation. Intercompany balances and transactions have been eliminated.

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 nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

Critical Accounting Policy - Allowance for Loan Losses

The allowance is established through provisions for loan losses charged to earnings. Loans are charged off against the allowance when the collectibility of principal is unlikely. Indirect automobile loans delinquent 120 days are charged off, net of recoverable value, unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. 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. Regarding the indirect automobile loan portfolio, allowances are established over the average life of the loans due to the absence of sufficient historical loss experience. The last component is an unallocated allowance which is 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 (a large portion of which is comprised of mortgage loans with repayment terms extended over many years) and (b) helps to minimize the risk related to the imprecision inherent in the estimation of the other two components of the allowance.

Earnings Per Common Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the applicable period, exclusive of unearned ESOP shares and unvested recognition and retention plan shares. Diluted earnings per share is calculated after adjusting the denominator of the basic earnings per share calculation for the effect of all potential dilutive common shares outstanding during the period. The dilutive effects of options and unvested restricted stock awards are computed using the “treasury stock” method.

Stock-Based Compensation

Deferred compensation for shares awarded under recognition and retention plans is recorded as a reduction of stockholders’ equity. Compensation expense is recognized over the vesting period of shares awarded based upon the fair value of the shares at the award date.

Compensation expense for the Employee Stock Ownership Plan (“ESOP”) is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair market value of the shares during the year. The Company recognizes compensation expense ratably over the year for the ESOP shares to be allocated based upon the Company’s estimate of the number of shares expected to be allocated. The difference between the average fair market value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in-capital.

In accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, the Company measures compensation cost for stock options as the excess of the fair market value of the Company’s stock at the grant date above the exercise price of options granted, if any. This generally does not result in compensation charges to earnings. As required by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, disclosed in the following table is net income and earnings per share, as reported, and pro forma net income and earnings per share as if compensation was measured at the date of grant based on the fair value of the award and recognized over the service period.

	Three months ended September 30,
	2005						2004
	Basic			Diluted			Basic			Diluted

Net income as reported	$	5,521		$	5,521		$	4,497		$	4,497
Total stock-based compensation expense determined using fair value accounting for stock option awards, net of taxes	(65		)	(65		)	(294		)	(294		)
Dividends on unvested restricted stock awards	(227		)	(216		)	(280		)	(272		)
Pro forma net income	$	5,229		$	5,240		$	3,923		$	3,931

Earnings per share:
As reported	$	0.09		$	0.09		$	0.08		$	0.08
Pro forma	0.09			0.09			0.07			0.07

	Nine months ended September 30,
	2005						2004
	Basic			Diluted			Basic			Diluted

Net income as reported	$	16,494		$	16,494		$	13,771		$	13,771
Total stock-based compensation expense determined using fair value accounting for stock option awards, net of taxes	(194		)	(194		)	(941		)	(941		)
Dividends on unvested restricted stock awards	(531		)	(508		)	(656		)	(634		)
Pro forma net income	$	15,769		$	15,792		$	12,174		$	12,196

Earnings per share:
As reported	$	0.27		$	0.27		$	0.24		$	0.24
Pro forma	0.26			0.26			0.21			0.21

As required by SFAS 123-R, “Share-Based Payment”, effective January 1, 2006 the Company will commence charging to expense the grant-date fair value of stock options over the requisite service period. Based on options outstanding at September 30, 2005, adoption of SFAS 123-R is not expected to have a material impact on the Company’s financial position or results of operations.

Cash Equivalents

For purposes of reporting cash flows, cash equivalents include highly liquid assets with an original maturity of three months or less. Highly liquid assets include cash and due from banks and short-term investments.

(2) Acquisition (Dollars in thousands except per share amounts)

On January 7, 2005, the Company acquired all of the outstanding common shares of Mystic Financial, Inc. (“Mystic”), the holding company of Medford Co-operative Bank (“Medford”), which had seven retail banking offices serving customers primarily in Middlesex County in Massachusetts. Management expects the acquisition of Mystic to provide expanded commercial and retail banking opportunities in that market. It also views the acquisition as a positive way to deploy some of the Company’s excess capital. As part of the acquisition, Mystic was merged into the Company and Medford was merged into Brookline. On April 11, 2005, the operating systems of Medford were converted to the operating systems of Brookline.

Under the terms of the transaction agreement, (a) 60% of the shares of Mystic common stock were exchanged for Company common stock based on an exchange ratio of 2.6786 shares of Company common stock for each share of Mystic common stock and (b) 40% of the shares of Mystic common stock were exchanged for cash of $39.00 per share. Cash was paid for fractional shares. The acquisition was accounted for using the purchase method of accounting, which requires that the assets and liabilities of Mystic be recorded at fair value as of the acquisition date. The results of operations of Mystic are included in the 2005 consolidated statement of income from the date of acquisition. The purchase price to complete the acquisition was $69,094.

The purchase price of the acquisition has been allocated to the assets acquired and liabilities assumed using their fair values at the acquisition date. The computation of the purchase price, the allocation of the purchase price to the net assets of Mystic and the resulting goodwill are presented below.

Purchase price
Mystic common stock exchanged (60% of shares outstanding) for Company common stock				939,567
Exchange ratio				2.6786
Company common stock issued (adjusted for fractional shares)				2,516,525
Purchase price per Company share of common stock (1)				$	15.57
Total value of the Company’s common stock exchanged						$	39,182
Cash paid in exchange for 40% of Mystic shares outstanding and in lieu of issuance of fractional shares						23,729
Cash paid to holders of Mystic stock options, net of related income tax benefits						2,605
Direct acquisition costs, net of related income tax benefits						4,686
Adjustment for 69,484 shares of Company common stock obtained and placed in treasury resulting from termination of Mystic’s employee stock option plan and Company common stock owned by Mystic						(1,108		)
Total purchase price						69,094

Allocation of the purchase price
Mystic stockholders’ equity				$	28,101
Adjustments to reflect assets acquired at fair value:
Investment securities	$	(181	)
Loans	(3,418		)
Bank premises and equipment	3,176
Other real estate owned	(132		)
Core deposit intangible	11,841
	11,286
Adjustments to reflect liabilities assumed at fair value:
Deposits	1,100
Borrowed funds	319
Subordinated debt	337
Deferred income tax liability	3,836
Other liabilities	316
	5,908
Net effect of fair value adjustments				5,378
Fair value of net assets acquired						33,479
Goodwill resulting from the acquisition						$	35,615

(1) The value assigned per common share was the closing market price of the Company’s shares on January 7, 2005. The price approximated the average market price of the Company’s shares for the two days prior to, and the two days following, January 7, 2005.

The core deposit intangible asset acquired is being amortized over nine years on an accelerated basis using the sum-of-the-digits method. Goodwill, which is not deductible for income tax purposes, will be subject to at least an annual test for impairment. If impairment is deemed to have occurred, the amount of impairment will be charged to expense when identified.

The following table summarizes unaudited pro forma information as if the acquisition of Mystic had been completed as of the beginning of each period presented. The pro forma data gives effect to actual operating results prior to the acquisition, the amortization of the core deposit intangible and the accretion and amortization of the purchase accounting adjustments which affected net interest income and non-interest expense. Special charges related to the acquisition and merger recorded by Mystic totaling $3,116 ($2,025 after-tax) and by the Company totaling $894 ($520 after-tax) have been excluded from the pro forma results for the nine months ended September 30, 2005. The special charges recorded by Mystic resulted in an increase in goodwill recorded in connection with the acquisition. In addition, an assumed interest charge relating to the cash portion of the purchase price was deducted from the pro forma operating results for both the three months and nine months ended September 30, 2005 and 2004. No effect has been given to expected cost reductions or operating synergies in this presentation. These pro forma amounts do not purport to be indicative of the results that would have been actually obtained if the acquisition had occurred as of the beginning of the periods presented or that may be obtained in the future.

	Three months ended						Nine months ended
	September 30,						September 30,
	2005			2004			2005			2004

Net interest income	$	16,949		$	16,399		$	51,386		$	48,908
Provision for loan losses	32			814			2,143			2,265
Net interest income after provision for loan losses	16,917			15,585			49,243			46,643
Non-interest income	928			1,787			4,447			5,753
Non-interest expense	(8,630		)	(9,704		)	(25,512		)	(28,008		)
Income before income taxes	9,215			7,668			28,178			24,388
Provision for income taxes	3,694			3,158			11,613			9,897
Net income	$	5,521		$	4,510		$	16,565		$	14,491

Earning per share:
Basic	$	0.09		$	0.08		$	0.28		$	0.24
Diluted	0.09			0.07			0.27			0.24

Weighted average shares outstanding:
Basic	60,108,206			59,821,011			60,080,013			59,676,300
Diluted	60,948,961			60,591,852			60,884,731			60,529,897

(3) Investment Securities (Dollars in thousands)

Securities available for sale and held to maturity are summarized below:

	September 30, 2005
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
Securities available for sale:
Debt securities:
U.S. Government-sponsored enterprises	$	262,750	$	—	$	1,462	$	261,288
Municipal obligations	8,673		—		124		8,549
Auction rate municipal obligations	12,750		—		—		12,750
Corporate obligations	7,987		79		15		8,051
Other obligations	500		—		—		500
Collateralized mortgage obligations issued by U.S. Government-sponsored enterprises	2,162		—		4		2,158
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	52,946		11		1,014		51,943
Total debt securities	347,768		90		2,619		345,239
Auction rate preferred stock	1,000		—		—		1,000
Other marketable equity securities	2,881		736		43		3,574
Total securities available for sale	$	351,649	$	826	$	2,662	$	349,813

Securities held to maturity:
Other obligations	$	500	$	—	$	—	$	500
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	341		16		—		357
Total securities held to maturity	$	841	$	16	$	—	$	857

	December 31, 2004
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
Securities available for sale:
Debt securities:
U.S. Government-sponsored enterprises	$	169,888	$	8	$	731	$	169,165
Municipal obligations	2,706		—		9		2,697
Corporate obligations	8,584		165		—		8,749
Other obligations	500		—		—		500
Collateralized mortgage obligations issued by U.S. Government-sponsored enterprises	46,016		6		87		45,935
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	24,346		47		47		24,346
Total debt securities	252,040		226		874		251,392
Auction rate preferred stock	5,000		—		—		5,000
Other marketable equity securities	2,940		1,529		9		4,460
Total securities available for sale	$	259,980	$	1,755	$	883	$	260,852

Securities held to maturity:
Other obligations	$	500	$	—	$	—	$	500
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	389		25		—		414
Total securities held to maturity	$	889	$	25	$	—	$	914

(4) Loans (Dollars in thousands)

A summary of loans follows:

	September 30,			December 31,
	2005			2004
Mortgage loans:
One-to-four family	$	284,427		$	135,995
Multi-family	383,753			334,884
Commercial real estate	365,381			297,014
Construction and development	36,661			35,237
Home equity	42,346			14,066
Second	23,320			53,499
Total mortgage loans	1,135,888			870,695
Commercial loans	105,252			75,349
Indirect automobile loans	446,947			368,962
Other consumer loans	3,182			2,406
Total gross loans	1,691,269			1,317,412
Unadvanced funds on loans	(82,075		)	(57,205		)
Deferred loan origination costs (fees):
Indirect automobile loans	11,010			9,732
Other	(114		)	(302		)
Total loans	$	1,620,090		$	1,269,637

(5) Allowance for Loan Losses (Dollars in thousands)

An analysis of the allowance for loan losses for the periods indicated follows:

	Nine month ended September 30,
	2005			2004

Balance at beginning of period	$	17,540		$	16,195
Allowance obtained through acquisition	3,501			—
Provision for loan losses	1,643			1,676
Charge-offs	(1,259		)	(777		)
Recoveries	475			67
Balance at end of period	$	21,900		$	17,161

(6) Deposits (Dollars in thousands)

A summary of deposits follows:

	September 30,		December 31,
	2005		2004

Demand checking accounts	$	67,156	$	38,588
NOW accounts	97,372		67,217
Savings accounts	98,456		30,634
Guaranteed savings accounts	38,508		49,844
Money market savings accounts	250,949		270,425
Certificate of deposit accounts	601,413		317,250
Total deposits	$	1,153,854	$	773,958

(7) Accumulated Other Comprehensive Income (Loss) (Dollars in thousands)

Accumulated other comprehensive income (loss) is comprised entirely of unrealized gains (losses) on securities available for sale, net of income taxes. At September 30, 2005 and December 31, 2004, such taxes amounted to ($677) and $312, respectively.

(8) Commitments (Dollars in thousands)

At September 30, 2005, the Company had outstanding commitments to originate loans of $44,407, $29,667 of which were commercial real estate and multi-family mortgage loans. Unused lines of credit available to customers were $52,460, of which $48,299 were equity lines of credit.

(9) Dividend Declaration

On October 20, 2005, the Board of Directors of the Company approved a quarterly dividend of $0.085 per share payable on November 15, 2005 to stockholders of record on October 31, 2005.

(10) Stock Plans (Dollars in thousands, except per share amounts)

Activity under the Company’s stock option plans for the nine months ended September 30, 2005 was as follows:

Options outstanding at January 1, 2005	3,182,508
Options exercised at $4.944 per share	(4,520	)
Options outstanding at September 30, 2005	3,177,988

Exercisable at September 30, 2005:
$4.944 per share	1,771,568
$11.00 per share	5,393
$12.91 per share	20,000
$14.95 per share	1,095,900
$15.42 per share	3,527
	2,896,388

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 expire or are terminated unexercised will again be available for issuance. Options awarded vest over periods ranging from less than one month through over five years. As of September 30, 2005, the number of options available for award under the Company’s 1999 Stock Option Plan and 2003 Stock Option Plan were 245,980 options and 1,142,500 options, respectively.

In accordance with the terms of the 1999 Stock Option Plan, dividend equivalent rights amounting to $702 and $734 were paid during the nine months ended September 30, 2005 and 2004 to holders of unexercised options as a result of the $0.20 per share extra dividends paid semi-annually to stockholders.

The Company has two recognition and retention plans, the “1999 RRP” and the “2003 RRP”. Under both of the plans, shares of the Company’s common stock were reserved for issuance as restricted stock awards to officers, employees and non-employee directors of 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 plans. Shares awarded vest over varying time periods ranging from six months up to eight years for the 1999 RRP and from less than three months to over five years for the 2003 RRP. In the event a recipient ceases to maintain continuous service with the Company by reason of normal retirement (only under the 1999 RRP), death or disability, or following a change in control, RRP shares still subject to restriction will vest and be free of such restrictions. As of September 30, 2005, the number of shares available for award under the 1999 RRP and the 2003 RRP were 29,774 shares and 107,600 shares, respectively.

Total expense for the RRP plans amounted to $668, $722, $2,040 and $2,168 for the three months and nine months ended September 30, 2005 and 2004, respectively.

(11) Postretirement Benefits (Dollars in thousands)

Postretirement benefits are provided for part of the annual expense of health insurance premiums for retired employees and their dependents. No contributions are made by the Company to invest in assets allocated for the purpose of funding this benefit obligation.

The following table provides the actual components of net periodic postretirement benefit costs for the three months and nine months ended September 30, 2004 and an estimate of the components of net periodic postretirement benefit costs for the three months and nine months ended September 30, 2005:

	Three months ended September 30,					Nine months ended September 30,
	2005			2004		2005			2004
Service cost	$	39		$	32	$	116		$	92
Interest cost	19			16		58			50
Transition obligation	—			4		—			14
Prior service cost	(5		)	—		(16		)	—
Actuarial loss	6			3		19			9
Net periodic benefit costs	$	59		$	55	$	177		$	165

Benefits paid for the nine months ended September 30, 2005 and 2004 amounted to $13 and $17, respectively.

(12) Stockholders’ Equity (Dollars in thousands)

Capital Distributions and Restrictions Thereon

OTS regulations impose limitations on all capital distributions by savings institutions. Capital distributions include cash dividends, payments to repurchase or otherwise acquire the institution’s shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The regulations establish three tiers of institutions. An institution, such as the Bank, that exceeds all capital requirements before and after a proposed capital distribution (“Tier 1institution”) may, after prior notice but without the approval of the OTS, make capital distributions during a year up to 100% of its current year net income plus its retained net income for the preceding two years not previously distributed. Any additional capital distributions require OTS approval.

Common Stock Repurchases

As of September 30, 2005, the Company was authorized to repurchase up to 1,772,532 shares of its common stock. The repurchase of additional shares would require prior authorization of the Board of Directors of the Company.

Restricted Retained Earnings

As part of the stock offering in 2002 and as required by regulation, Brookline Bank established a liquidation account for the benefit of eligible account holders and supplemental eligible account holders who maintain their deposit accounts at Brookline Bank after the stock offering. In the unlikely event of a complete liquidation of Brookline Bank (and only in that event), eligible depositors who continue to maintain deposit accounts at Brookline Bank would be entitled to receive a distribution from the liquidation account. Accordingly, retained earnings of the Company are deemed to be restricted up to the balance of the liquidation account. The liquidation account balance is reduced annually to the extent that eligible depositors have reduced their qualifying deposits as of each anniversary date. Subsequent increases in deposit account balances do not restore an account holder’s interest in the liquidation account. The liquidation account totaled $48,209 at December 31, 2004.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of the Company.

The following discussion contains forward-looking statements based on management’s current expectations regarding economic, legislative and regulatory issues that may impact the Company’s earnings and financial condition in the future. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Any statements included herein preceded by, followed by or which include the words “may”, “could”, “should”, “will”, “would”, “believe”, “expect”, “anticipate”, “estimate”, “intend”, “plan”, “assume” or similar expressions constitute forward-looking statements.

Forward-looking statements, implicitly and explicitly, include assumptions underlying the statements. While the Company believes the expectations reflected in its forward-looking statements are reasonable, the statements involve risks and uncertainties that are subject to change based on various factors, some of which are outside the control of the Company. The following factors, among others, could cause the Company’s actual performance to differ materially from the expectations, forecasts and projections expressed in the forward-looking statements: general and local economic conditions, changes in interest rates, demand for loans, real estate values, deposit flows, regulatory considerations, competition, technological developments, retention and recruitment of qualified personnel, and market acceptance of the Company’s pricing, products and services.

Overview of the Company’s Activities and Risks

The primary activities of the Company are to gather deposits from the general public and to invest the resulting funds, plus those derived from borrowings, capital initiatives and operations, in loans and investment securities. The Company’s loan portfolio is comprised substantially of loans secured by real estate and indirect automobile loans. The investment portfolio is comprised primarily of debt securities and mortgage-backed securities issued by the U.S. Government and U.S. Government-sponsored enterprises.

To operate successfully, the Company must manage various types of risk, including but not limited to, market or interest rate risk, credit risk, transaction risk, liquidity risk, security risk, strategic risk, reputation risk and compliance risk. While all of these risks are important, the risks of greatest significance to the Company relate to market or interest rate risk and credit risk.

Market risk is the risk of loss from adverse changes in market prices and/or interest rates. Since net interest income (the difference between interest earned on loans and investments and interest paid on deposits and borrowings) is the Company’s primary source of revenue, interest rate risk is the most significant non-credit related market risk to which the Company is exposed. Net interest income is affected by changes in interest rates as well as fluctuations in the level and duration of the Company’s assets and liabilities.

Interest rate risk is the exposure of the Company’s net interest income to adverse movements in interest rates. In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers and debt issuers to repay loans and debt securities, the volume of loan repayments and refinancings, and the flow and mix of deposits.

Credit risk is the risk to the Company’s earnings and stockholders’ equity that results from customers, to whom loans have been made or the issuers of debt securities in which the Company has invested, failing to repay their obligations. The magnitude of risk depends on the capacity and willingness of borrowers and debt issuers to repay and the sufficiency of the value of collateral obtained to secure the loans made or investments purchased.

The Company’s critical accounting policy relates to the allowance for loan losses. See note 1 to the unaudited consolidated financial statements included on page 8 herein for a description of that accounting policy and the “Non-Performing Assets, Restructured Loans and Allowance for Loan Losses” sub-section appearing on page 24 herein.

Executive Summary

Operating Highlights

	Three months ended						Nine months ended
	September 30,						September 30,
	2005			2004			2005			2004
	(In thousands except per share amounts)

Net interest income	$	16,949		$	12,661		$	51,133		$	37,723
Provision for loan losses	32			635			1,643			1,676
Non-interest income	928			1,494			4,124			4,604
Merger/conversion expense	1			—			894			—
Amortization of core deposit intangible	593			—			1,778			—
Other non-interest expenses	8,036			5,859			23,252			17,245
Income before income taxes	9,215			7,661			27,690			23,406
Provision for income taxes	3,694			3,164			11,196			9,635
Net income	5,521			4,497			16,494			13,771

Basic earnings per common share	$	0.09		$	0.08		$	0.27		$	0.24
Diluted earnings per common share	0.09			0.08			0.27			0.24

Interest rate spread	2.42		%	2.28		%	2.51		%	2.33		%
Net interest margin	3.20		%	3.14		%	3.25		%	3.20		%

Financial Condition Highlights

	At			At			At
	September 30,			December 31,			September 30,
	2005			2004			2004
	(In thousands)

Total assets	$	2,207,088		$	1,694,499		$	1,643,274
Net loans	1,598,190			1,252,097			1,222,765
Deposits	1,153,854			773,958			735,306
Borrowed funds	421,896			320,171			305,490
Stockholders’ equity	601,506			585,013			585,043

Allowance for loan losses	$	21,900		$	17,540		$	17,161
Non-performing assets	1,869			439			336

Stockholders’ equity to total assets	27.25		%	34.52		%	35.60		%

The major factors affecting comparison of the operating and financial condition highlights presented above were:

• The acquisition of Mystic Financial, Inc. (“Mystic”) as of January 7, 2005

• Changes in interest rate spread and net interest margin – see the Operating Highlights table above

• Continued growth of the indirect automobile loan portfolio - $447 million in loans outstanding at September 30, 2005 compared to $369 million at the end of 2004, $345 million at September 30, 2004 and $211 million at the end of 2003

• Excluding indirect automobile loans, a decline of $16 million in loans outstanding in the 2005 quarterly period

• Lower provision for loan losses - $32,000 in the 2005 quarterly period compared to $635,000 in the 2004 quarterly period

• A $250,000 write-down of a foreclosed property included in other non-interest expenses in the 2005 quarterly period

Detailed commentary on each of the items listed on the preceding page follows.

Acquisition of Mystic

As described more fully in note 2 to the unaudited consolidated financial statements on pages 9 through 11 herein, the Company acquired Mystic on January 7, 2005. The acquisition added $486.8 million to the Company’s assets at that date (including goodwill of $35.6 million and a core deposit intangible of $11.8 million) and $420.4 million (including deposits of $332.3 million) to the Company’s liabilities. These additions accounted for much of the increase in the Company’s assets and liabilities between December 31, 2004 and September 30, 2005. The issuance of 2,516,525 shares of the Company’s common stock in connection with the acquisition added $39.2 million to stockholders’ equity.

Much of the improvement in net interest income in the three month and nine month periods ended September 30, 2005 compared to the three month and nine month periods ended September 30, 2004 was attributable to the inclusion of the acquired assets and liabilities mentioned above. As part of the acquisition, Mystic was merged into the Company and, on April 11, 2005, the operating systems of Mystic’s bank subsidiary (“Medford”) were converted to the operating systems of the Company’s bank subsidiary (“Brookline”). Merger/conversion related expenses of $894,000 were incurred in the nine month period ended September 30, 2005, substantially all of which were incurred in the first half of 2005.

Non-interest expense in the three month and nine month periods ended September 30, 2005 also included charges for amortization of the core deposit intangible of $593,000 and $1,778,000, respectively. Amortization of that asset, which is deductible for income tax purposes, will occur over a nine year period on an accelerated basis. Total amortization will be as follows (in thousands):

Year ended December 31:
2005	$	2,368
2006	2,105
2007	1,842
2008	1,579
2009	1,316
2010 through 2013	2,631

Average Balances, Net Interest Income, Interest Rate Spread and Net Interest Margin

The following tables set forth information about the Company’s average balances, interest income and rates earned on average interest-earning assets, interest expense and rates paid on interest-bearing liabilities, interest rate spread and net interest margin for the three months and nine months ended September 30, 2005 and 2004. Average balances are derived from daily average balances and yields include fees and costs which are considered adjustments to yields.

	Three months ended September 30,
	2005								2004
	Average balance				Interest (1)		Average yield/ cost		Average balance			Interest (1)		Average yield/ cost
	(Dollars in thousands)
Assets
Interest-earning assets:
Short-term investments	$	148,957			$	1,259	3.35	%	$	114,288		$	401	1.39	%
Debt securities (2)	341,734				2,943		3.45		262,097			1,435		2.19
Equity securities (2)	31,572				348		4.38		26,188			228		3.46
Mortgage loans (3)	1,089,451				16,762		6.15		819,984			12,066		5.89
Money market loan participations	—				—		—		3,768			14		1.47
Commercial loans (3)	73,321				1,124		6.11		49,358			563		4.56
Indirect automobile loans (3)	444,258				4,892		4.37		338,820			3,394		3.97
Other consumer loans (3)	3,117				52		7.19		2,471			44		7.12
Total interest-earning assets	2,132,410				27,380		5.12	%	1,616,974			18,145		4.47	%
Allowance for loan losses	(22,253			)					(17,042		)
Non-interest earning assets	99,631								30,503
Total assets	$		2,209,788						$	1,630,435

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
NOW accounts	$		96,616		45		0.18	%	$	62,775		21		0.13	%
Savings accounts	143,306				507		1.40		81,173			374		1.83
Money market savings accounts	260,271				1,161		1.77		276,164			767		1.10
Certificate of deposit accounts	583,760				4,446		3.02		274,607			1,813		2.62
Total deposits	1,083,953				6,159		2.25		694,719			2,975		1.70
Borrowed funds	424,401				3,994		3.68		294,749			2,477		3.29
Subordinated debt	12,269				182		5.77		—			—		—
Total interest bearing liabilities	1,520,623				10,335		2.70	%	989,468			5,452		2.19	%
Non-interest-bearing demand checking accounts	67,711								36,563
Other liabilities	14,694								13,925
Total liabilities	1,603,028								1,039,956
Stockholders’ equity	606,760								590,479
Total liabilities and stockholders’ equity	$		2,209,788						$	1,630,435
Net interest income (tax equivalent basis)/interest rate spread (4)					17,045		2.42	%				12,693		2.28	%
Less adjustment of tax exempt income					96							32
Net interest income					$	16,949						$	12,661
Net interest margin (5)							3.20	%						3.14	%

(1) Tax exempt income on equity securities and municipal bonds is included on a tax equivalent basis.

(2) Average balances include unrealized gains on securities available for sale. Equity securities include marketable equity securities (preferred and common stocks) and restricted equity securities.

(3) Loans on non-accrual status are included in average balances.

(4) Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.

(5) Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.

	Nine months ended September 30,
	2005								2004
	Average balance				Interest (1)		Average yield/ cost		Average balance			Interest (1)		Average yield/ cost
	(Dollars in thousands)
Assets
Interest-earning assets:
Short-term investments	$	143,762			$	3,115	2.89	%	$	117,998		$	1,004	1.13	%
Debt securities (2) (4)	332,851				7,910		3.17		270,879			4,900		2.41
Equity securities (2)	31,607				1,011		4.27		25,171			571		3.02
Mortgage loans (3)	1,101,200				50,289		6.09		822,673			36,349		5.89
Money market loan participations	57				1		2.42		2,051			21		1.37
Other commercial loans (3)	75,272				3,334		5.89		36,950			1,423		5.13
Indirect automobile loans (3)	416,446				13,129		4.20		296,603			8,722		3.92
Other consumer loans (3)	3,040				156		7.19		2,351			131		7.43
Total interest-earning assets	2,104,235				78,945		4.99	%	1,574,676			53,121		4.49	%
Allowance for loan losses	(21,319			)					(16,632		)
Non-interest earning assets	97,117								31,441
Total assets	$		2,180,033						$	1,589,485

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
NOW accounts	$		98,273		121		0.16	%	$	62,231		63		0.13	%
Savings accounts	154,158				1,609		1.39		64,799			788		1.62
Money market savings accounts	276,233				3,150		1.52		284,040			2,547		1.20
Certificate of deposit accounts	529,401				11,191		2.82		263,884			5,106		2.58
Total deposits	1,058,065				16,071		2.03		674,954			8,504		1.68
Borrowed funds	413,941				11,048		3.56		269,172			6,790		3.36
Subordinated debt	11,871				485		5.45		—			—		—
Total interest bearing liabilities	1,483,877				27,604		2.48	%	944,126			15,294		2.16	%
Non-interest-bearing demand checking accounts	67,685								34,900
Other liabilities	15,498								14,470
Total liabilities	1,567,060								993,496
Stockholders’ equity.	612,973								595,989
Total liabilities and stockholders’ equity	$		2,180,033						$	1,589,485
Net interest income (tax equivalent basis)/interest rate spread (5)					51,341		2.51	%				37,827		2.33	%
Less adjustment of tax exempt income					208							104
Net interest income					$	51,133						$	37,723
Net interest margin (6)							3.25	%						3.20	%

(1) Tax exempt income on equity securities and municipal bonds is included on a tax equivalent basis.

(2) Average balances include unrealized gains on securities available for sale. Equity securities include marketable equity securities (preferred and common stocks) and restricted equity securities.

(3) Loans on non-accrual status are included in average balances.

(4) Included in interest on debt securities in the 2004 period is $250 of accelerated amortization of premium. Excluding this charge, yield on the debt securities portfolio would have been 2.54% and the yield on interest-earning assets would have been 4.51%.

(5) Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.

(6) Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.

Highlights from the tables on this page and the preceding page follow.

• Net interest income was $4,288,000, or 34%, higher in the 2005 quarter compared to the 2004 quarter and $13,410,000, or 36%, higher in the 2005 nine month period compared to the 2004 nine month period. The increases were due to growth in assets, notably from the Mystic acquisition and higher balances of indirect automobile loans, and improvement in interest rate spread from 2.28% in the 2004 quarter to 2.42% in the 2005 quarter and from 2.33% in the 2004 nine month period to 2.51% in the 2005 nine month period.

• After completion of the Mystic acquisition, in the 2005 first quarter, the Company sold $29.9 million of fixed rate residential mortgage loans originated by Mystic with 15 to 30 year maturities and $8.9 million of callable bonds purchased by Mystic with maturities extendable to over 10 years. While the sale of these assets had an adverse short-term effect on interest income, the risk of a decline in earnings in the future from holding long-term fixed rate assets in a rising interest rate environment was reduced.

• While interest rate spread improved in the 2005 third quarter compared to the 2004 third quarter, it declined from 2.59% in the 2005 first quarter and 2.52% in the 2005 second quarter. The 2005 quarterly declines resulted from a more rapid increase in the average rates paid on deposits and all interest-bearing liabilities (23 basis points in the 2005 third quarter and 19 basis points in the 2005 second quarter) than the increase in the average rates earned on assets (13 basis points in the 2005 third quarter and 12 basis points in the 2005 second quarter). The rise in the average rate paid for funds resulted from the rate setting actions of the Federal Reserve, increased competition for deposits and a shift in the mix of deposits. Customarily, higher rates are paid on certificates of deposit than on transaction deposit accounts. Certificates of deposit comprised 52% of total deposits at September 30, 2005 compared to 48% at June 30, 2005 and 41% at December 31, 2004.

Net interest margin improved from 3.14% in the 2004 quarter to 3.20% in the 2005 quarter and from 3.20% in the 2004 nine month period to 3.25% in the 2005 nine month period, but declined from 3.26% in the 2005 second quarter and 3.31% in the 2005 first quarter. The 2005 quarterly declines resulted primarily from the developments mentioned above and a reduction in the percent of total assets comprised of mortgage loans from 54% in the first quarter of 2005 to 52% in the second quarter of 2005 and 51% in the third quarter of 2005. Typically, the yield on mortgage loans is higher than the yields earned on the Company’s other interest earning assets.

While interest income is expected to continue to improve in the next several months, interest rate spread and net interest margin could experience further declines if the upward repricing of deposits and borrowed funds occurs faster than increases in asset yields. Trends in interest rates depend on many factors and, accordingly, actual rates in the future could vary significantly with the Company’s predictions.

Indirect Automobile Lending

The indirect automobile loan portfolio has grown from $211 million at the end of 2003 to $369 million at the end of 2004 and $447 million at September 30, 2005. Sustaining a steady rate of growth becomes more challenging as loan portfolio balances rise because of the increase in cash flow that results from normal scheduled loan payments. It should also be noted that dealerships are experiencing declining sales and this will likely result in a reduction in the Company’s loan originations in the next quarter or two. While the Company still expects to grow its automobile loan portfolio, the rate of growth will be modest and considerably less than that experienced over the past two years. Actual growth will depend on a number of factors, including the economy, the interest rate environment, the appetite of consumers for new and used automobiles, incentives offered by manufacturers and our success in establishing relationships with additional dealerships.

The Company continues to focus on originating loans to customers with good credit histories. The average credit score of all indirect automobile loans outstanding at September 30, 2005 exceeded 730 and loans with credit scores below 660 at that date were less than 10%. At September 30, 2005, indirect automobile loans delinquent more than 30 days were $4.5 million, or 1.01% of the portfolio. Net charge-offs in the nine months ended September 30, 2005 were $863,000, resulting in an annualized net charge-off rate of 0.28% of average indirect automobile loans outstanding during that period.

Loans Other Than Indirect Automobile Loans

Loans acquired in the Mystic transaction have declined from $299 million at March 31, 2005 to $280 million at June 30, 2005 and $255 million at September 30, 2005. Of the $25 million reduction in the 2005 third quarter, approximately $10 million related to residential mortgage loans, $7 million to construction loans and $8 million to other loan categories concentrated primarily in the commercial sector. Part of the reduction was planned. Construction loans and certain other commercially-related loans in the Mystic portfolio were deemed to have higher risk characteristics and accordingly, efforts were focused on having those loans paid off or strengthened through the obtaining of additional collateral. Regarding residential mortgage loans, traditionally, the Company has placed less emphasis on this lending sector due in part to the typically longer fixed rate maturities of such loans. Recent less favorable trends in that market sector have also prompted the Company to reduce its origination of residential mortgage loans.

Excluding indirect automobile loans and the loans acquired in the Mystic transaction, the remainder of the loan portfolio increased approximately $9 million in the 2005 third quarter. This growth is net of a $14 million reduction in construction loans. The Company believes that the risks associated with construction lending have increased in the past several months and, accordingly, it is being especially selective in committing to new construction projects.

Historically, commercial and multi-family real estate lending has been the most significant part of the Company’s lending activities. There is considerable competition for these types of loans. Competition has intensified in the last year or two, especially with respect to pricing. The Company plans to be more aggressive in its efforts to originate new loans in this sector through better matching of market pricing. In pursuing commercial real estate loan growth, the Company will not depart from the conservative underwriting criteria it has consistently applied in originating such loans.

Provision for Loan Losses

The provision for loan losses decreased from $635,000 in the 2004 third quarter to $32,000 in the 2005 third quarter and from $1,676,000 in the 2004 nine month period to $1,643,000 in the 2005 nine month period. The considerably lower provision in the 2005 third quarter was due to a $650,000 credit resulting from payoffs of loans acquired in the Mystic transaction, including certain higher risk loans. The Company is utilizing its more conservative underwriting criteria in the origination of new loans to the Mystic customer base and is striving to strengthen the collectibility of certain commercial real estate and commercial and industrial loans acquired in the Mystic transaction by obtaining additional collateral and better repayment terms. Success in these endeavors could improve the collectibility of such loans and, accordingly, allow for future recapture of amounts provided that resulted from assignment of higher risk ratings. Conversely, if endeavors are not successful, the ultimate collectibility of such acquired loans could be impeded and result in additional provisions for loan losses. At this time, it is not expected that any required additional provisions due to unsuccessful efforts to strengthen such acquired loans will be material to the Company’s financial statements. Actual amounts provided in the future related to acquired loans, if any, will depend on each loan’s facts and circumstances as of the dates financial statements are presented. Except for two loans with an aggregate balance of $710,000 delinquent over 30 days, all acquired commercial real estate and commercial and industrial loans were current in their payments at September 30, 2005.

Of the totals provided for loan losses, the following amounts were attributable to the indirect automobile loan portfolio: $692,000 and $575,000 in the respective 2005 and 2004 quarters and $2,019,000 and $1,457,000 in the respective 2005 and 2004 nine month periods. Net charge-offs of indirect automobile loans in those periods were $307,000, $434,000, $863,000 and $705,000, respectively. The substantial excess of provisions over charge-offs is in light of the growth of the portfolio and the short amount of time that has elapsed since February 2003 when the Company commenced originating such loans. The economy has been relatively strong since the beginning of 2003 and, accordingly, the Company has no experience on how collection of the portfolio could be affected in a weakened economy. Until such experience is garnered and the rate of portfolio growth starts to subside, the Company expects that amounts provided for loan losses related to the indirect automobile loan portfolio will continue to exceed net charge-offs.

Other Real Estate Owned Write-Down

As discussed more fully under the section “Non-Performing Assets, Restructured Loans and Allowance for Loan Losses” on page 23 herein, the carrying value of a foreclosed residential property was reduced by a $250,000 charge to expense in the 2005 third quarter. That charge is included in other non-interest expenses.

Other Highlights

Securities Gains. There were no gains from sales of marketable equity securities in the 2005 third quarter compared to $806,000 of gains in the 2004 third quarter. Gains from sales of marketable equity securities declined from $1,767,000 in the 2004 nine month period to $853,000 in the 2005 nine month period.

Mortgage Loan Prepayment Fees. Fees from mortgage loan prepayments increased from $223,000 in the 2004 quarter to $274,000 in the 2005 quarter and from $1,364,000 in the 2004 nine month period to $1,419,000 in the 2005 nine month period. Generally, mortgage loan prepayments decline when interest rates are rising.

Non-Interest Expenses. Excluding merger/conversion expenses, amortization of the core deposit intangible and the $250,000 write-down in the carrying value of other real estate owned in the 2005 third quarter, non-interest expense increased $1,927,000, or 33%, in the 2005 quarter compared to the 2004 quarter and $5,757,000, or 33%, in the 2005 nine month period compared to the 2004 nine month period. Most of the increases were attributable to the Mystic acquisition, the opening of a new branch in the fall of 2004, higher premiums for employee medical benefits and higher professional fees resulting primarily from compliance with the requirements of the Sarbanes-Oxley Act relating to internal control over financial reporting.

Non-Performing Assets, Restructured Loans and Allowance for Loan Losses

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

	September 30, 2005			December 31, 2004
	(Dollars in thousands)
Non-accrual loans:
Indirect automobile loans	$	133		$	111
One-to-four family mortgage loans	167			—
Total non-accrual loans	300			111
Other real estate owned	1,150			—
Repossessed vehicles	419			328
Total non-performing assets	$	1,869		$	439

Restructured loans	—			—

Allowance for loan losses	$	21,900		$	17,540

Allowance for loan losses as a percent of total loans	1.35		%	1.38		%
Non-accrual loans as a percent of total loans	0.02		%	0.01		%
Non- performing assets as a percent of total assets	0.08		%	0.03		%

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 equalled non-accrual loans at September30, 2005 and December 31, 2004. A specific reserve of $67 was established on a one-to-four family residential mortgage loan on non-accrual atSeptember 30, 2005.

Other real estate owned at September 30, 2005 was comprised of a residential property resulting from a foreclosure initiated by Mystic prior to the acquisition date. Based on the obtaining of an updated appraisal and recent offers to acquire the property, the Company reduced the carrying value of the property by a $250,000 charge to expense in the 2005 third quarter. The sale of the property is scheduled to take place in the fourth quarter of 2005.

The increase in the allowance for loan losses from $17.5 million at December 31, 2004 to $21.9 million at September 30, 2005 resulted primarily from the inclusion of Mystic’s allowance for loan losses of $3.5 million as of the acquisition date. That amount included $500,000 for a $1.4 million Mystic loan identified as a potential problem loan and $225,000 to conform the methodology applied by Mystic to arrive at its allowance for loan losses to that applied by the Company. These additions are included in the total provision for loan losses in the pro forma statement of income for the nine months ended September 30, 2005 presented in note 2 to the unaudited consolidated financial statements appearing on page 9 herein.

See the “Provision for Loan Losses” subsection on page 22 herein for additional comments relating to provisions added to the allowance for loan losses. The comments relate to the indirect automobile loan portfolio and certain loans acquired in the Mystic transaction.

Prior to January 1, 2005, the Company allocated part of its allowance for loan losses to address the risk associated with the normal lag that exists between the time deterioration might occur in a higher risk loan (commercial loans and mortgage loans excluding residential and home equity mortgage loans) and when such deterioration becomes known. While this lag represents an additional risk, the Company has determined that measurement of that risk is not readily quantifiable and that the amounts previously allocated for such risk were based on somewhat arbitrary assumptions. Accordingly, the amount previously allocated for such risk ($1.5 million at December 31, 2004) has been included in the unallocated portion of the allowance effective January 1, 2005. After inclusion of that amount, the unallocated portion of the allowance at September 30, 2005 was $4.1 million, or 19% of the total allowance for loan losses at that date.

Asset/Liability Management

The Company’s Asset/Liability Committee is responsible for managing interest rate risk and reviewing with the Board of Directors on a quarterly basis its activities and strategies, the effect of those strategies on the Company’s operating results, the Company’s interest rate risk position and the effect changes in interest rates would have on the Company’s net interest income.

Generally, it is the Company’s policy to reasonably match the rate sensitivity of its assets and liabilities. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within the same time period.

At September 30, 2005, interest-earning assets maturing or repricing within one year amounted to $911 million and interest-bearing liabilities maturing or repricing within one year amounted to $991 million, resulting in a cumulative one year negative gap position of $80 million, or 3.6% of total assets. At December 31, 2004, the Company had a positive one year cumulative gap position of $146 million, or 8.6% of total assets. The change in the cumulative one year gap position is due primarily to inclusion of the assets acquired and liabilities assumed in the Mystic acquisition and an increase in deposits and borrowed funds maturing or repricing within one year.

Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, principal and interest payments on loans and debt securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and investments are predictable sources of funds, deposit flows and mortgage loan prepayments are greatly influenced by interest rate trends, economic conditions and competition.

Deposits increased from $735 million at September 30, 2004 to $1.154 billion at September 30, 2005. Of the $419 million increase between those dates, $332 million resulted from the Mystic acquisition. The balance of Mystic related deposits increased to $349 million at September 30, 2005. The attractive deposit base of Mystic was one of the important reasons for pursuing the acquisition.

In the 2005 third quarter, deposits increased by $8 million, or 0.8%. The mix of the deposits changed more dramatically in that period as balances in certificate of deposit accounts increased by $46 million and balances in transaction deposit accounts declined by $38 million. This shift was caused by the higher interest rate environment emanating from the actions of the Federal Reserve over the past year and more aggressive deposit pricing by competitors. While the Company believes that it will retain its deposit base, it is expected that the rates that will have to be offered to maintain and grow deposits will continue to rise. In the 2005 fourth quarter, approximately $145 million of certificates of deposit bearing an average annual rate of interest of 2.79% will mature. Renewal of these deposits at maturity will likely result in a higher average annual rate of interest than that which exists at present.

The Company utilizes advances from the FHLB to fund growth and to manage part of the interest rate sensitivity of its assets and liabilities. Total advances outstanding at September 30, 2005 amounted to $422 million and the Company had the capacity to increase that amount to $605 million. Of the advances outstanding, $90 million will mature in the 2005 fourth quarter. The average annual rate paid on those advances is 2.72%. As in the case of deposits mentioned above, renewal of these maturing advances will result in a higher average annual rate of interest than that which exists at present.

The Company’s most liquid assets are cash and due from banks, short-term investments and debt securities that generally mature within 90 days. At September 30, 2005, such assets amounted to $185 million, or 8% of total assets.

At September 30, 2005, Brookline Bank exceeded all regulatory capital requirements. The Bank’s Tier I capital was $412 million, or 21% of adjusted assets. The minimum required Tier I capital ratio is 4%.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

For a discussion of the Company’s management of market risk exposure, see “Asset/Liability Management” in Item 2 of Part 1 of this report (pages 23 and 24 herein) and pages 14 through 17 of the Company’s Annual Report incorporated by reference in Part II item 7A of Form 10-K for the fiscal year ending December 31, 2004.

For quantitative information about market risk, see pages 14 through 17 of the Company’s 2004 Annual Report.

Item 4. Controls and Procedures

Under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act) at the end of the period covered by this report. Based upon that evaluation, the chief executive officer and the chief financial officer concluded that, as of the period covered by this report, the Company’s disclosure controls and procedures were effective to insure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms.

There has been no change in the Company’s internal control over financial reporting identified in connection with the quarterly evaluation that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

The Company and its subsidiaries are not involved in any litigation, nor is the Company aware of any pending litigation, other than legal proceedings incident to the business of the Company. Management believes the results of any current pending litigation would be immaterial to the consolidated financial condition or results of operations of the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

None

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibits

Exhibit 31.1		Certification of Chief Executive Officer

Exhibit 31.2		Certification of Chief Financial Officer

Exhibit 32.1		Section 1350 Certification of Chief Executive Officer

Exhibit 32.2		Section 1350 Certification of Chief Financial Officer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.

BROOKLINE BANCORP, INC.

Date: November 7, 2005	By:	/s/ Richard P. Chapman, Jr.
		Richard P. Chapman, Jr.
		President and Chief Executive Officer


Date: November 7, 2005	By:	/s/ Paul R. Bechet
		Paul R. Bechet
		Senior Vice President, Treasurer and Chief Financial Officer

Brookline Bancorp - 10-Q quarterly report FY

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