BROOKLINE BANCORP INC - 10-Q Quarterly Report

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 June 30, 2004

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 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 – 59,142,640 shares outstanding as of August 2, 2004.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

FORM 10-Q

Index

Part I	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003

	Consolidated Statements of Income for the three months and six months ended June 30, 2004 and 2003

	Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2004 and 2003

	Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2004 and 2003

	Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003

	Notes to Unaudited Consolidated Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risks

Item 4.	Controls and Procedures

Part II	Other Information

Item 1.	Legal Proceedings

Item 2.	Changes in Securities

Item 3.	Defaults Upon Senior Securities

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

Item 5.	Other Information

Item 6.	Exhibits and Reports on Form 8-K

	Signatures

Part I. Financial Information

Item 1. Financial Statements

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands except share data)

	June 30, 2004			December 31, 2003
	(unaudited)
ASSETS
Cash and due from banks	$	9,639		$	15,131
Short-term investments	118,748			127,572
Securities available for sale	276,489			287,952
Securities held to maturity (market value of $1,251 and $1,381, respectively)	1,222			1,343
Restricted equity securities	15,125			11,401
Loans, excluding money market loan participations	1,177,005			1,072,740
Money market loan participations	6,000			2,000
Allowance for loan losses	(16,962		)	(16,195		)
Net loans	1,166,043			1,058,545
Other investment	4,318			4,251
Accrued interest receivable	5,712			5,248
Bank premises and equipment, net	2,663			2,737
Deferred tax asset	9,116			8,843
Prepaid income taxes	12			—
Other assets	1,131			1,011
Total assets	$	1,610,218		$	1,524,034

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	725,486		$	679,921
Borrowed funds	273,738			220,519
Mortgagors’ escrow accounts	4,579			4,565
Income taxes payable	—			1,489
Accrued expenses and other liabilities	10,173			10,856
Total liabilities	1,013,976			917,350

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; 60,409,532 shares and 60,160,530 shares issued, respectively	604			602
Additional paid-in capital	471,100			469,493
Retained earnings, partially restricted	157,174			169,417
Accumulated other comprehensive income	1,003			2,529
Treasury stock, at cost – 1,335,299 shares	(17,017		)	(17,017		)
Unearned compensation - recognition and retention plans	(12,406		)	(13,960		)
Unallocated common stock held by ESOP – 773,290 shares and 803,356 shares, respectively	(4,216		)	(4,380		)
Total stockholders’ equity	596,242			606,684
Total liabilities and stockholders’ equity	$	1,610,218		$	1,524,034

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 June 30,					Six months ended June 30,
	2004		2003			2004		2003
	(unaudited)
Interest income:
Loans	$	15,506	$	13,918		$	30,565	$	27,186
Debt securities	1,942		910			3,448		4,163
Marketable equity securities	69		96			148		208
Restricted equity securities	71		71			140		147
Short-term investments	305		350			603		928
Total interest income	17,893		15,345			34,904		32,632

Interest expense:
Deposits	2,832		3,224			5,529		6,666
Borrowed funds	2,174		1,409			4,313		2,830
Total interest expense	5,006		4,633			9,842		9,496
Net interest income	12,887		10,712			25,062		23,136
Provision for loan losses	711		360			1,041		735
Net interest income after provision for loan losses	12,176		10,352			24,021		22,401

Non-interest income:
Fees and charges	549		714			1,670		1,260
Gains on securities, net	381		181			961		508
Swap agreement market valuation credit	88		18			128		37
Other income	211		181			351		248
Total non-interest income	1,229		1,094			3,110		2,053

Non-interest expense:
Compensation and employee benefits	2,537		2,396			5,072		4,749
Recognition and retention plans	718		26			1,446		66
Occupancy	374		443			791		781
Equipment and data processing	1,091		776			2,084		1,403
Advertising and marketing	189		188			376		375
Dividend equivalent rights	—		—			375		—
Other	636		751			1,242		1,339
Total non-interest expense	5,545		4,580			11,386		8,713

Income before income taxes	7,860		6,866			15,745		15,741

Income tax expense:
Provision for income taxes	3,238		2,906			6,471		6,414
Retroactive (credit) assessment related to REIT	—		(2,727		)	—		2,788
Total income tax expense	3,238		179			6,471		9,202

Net income	$	4,622	$	6,687		$	9,274	$	6,539

Earnings per common share:
Basic	$	0.08	$	0.12		$	0.16	$	0.11
Diluted	0.08		0.12			0.16		0.11

Weighted average common shares outstanding during the period:
Basic	57,247,354		56,599,521			57,156,108		57,031,545
Diluted.	58,057,812		57,575,487			58,051,083		57,995,708

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
	(unaudited)

Net income	$	4,622		$	6,687		$	9,274		$	6,539

Other comprehensive income, net of taxes:
Unrealized holding loss	(1,820		)	(907		)	(1,421		)	(1,919		)
Income tax benefit	653			416			511			763
Net unrealized holding loss	(1,167		)	(491		)	(910		)	(1,156		)

Less reclassification adjustment for gains included in net income:
Realized gains	381			181			961			508
Income tax expense	137			65			345			182
Net reclassification adjustment	244			116			616			326

Net other comprehensive loss	(1,411		)	(607		)	(1,526		)	(1,482		)

Comprehensive income	$	3,211		$	6,080		$	7,748		$	5,057

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

Six months ended June 30, 2004 and 2003 (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, 2002	$	587	$	449,254		$	185,788		$	4,155		$	(1,944	)	$	(741	)	$	(4,718	)	$	632,381

Net income.	—		—			6,539			—			—			—			—			6,539

Unrealized loss on securities available for sale, net of reclassification adjustment	—		—			—			(1,482		)	—			—			—			(1,482		)

Common stock dividend of $0.17 per share	—		—			(9,743		)	—			—			—			—			(9,743		)

Proceeds from exercise of stock options (238,856 shares)	2		1,278			—			—			—			—			—			1,280

Income tax benefit from exercise of non-incentive stock options	—		464			—			—			—			—			—			464

Treasury stock purchases (1,165,000 shares)	—		—			—			—			(15,073		)	—			—			(15,073		)

Recognition and retention shares forfeited	—		(87		)	—			—			—			87			—			—

Income tax benefit from dividend paid to ESOP participants	—		3			—			—			—			—			—			3

Compensation under recognition and retention plan	—		—			—			—			—			66			—			66

Common stock held by ESOP committed to be released (31,002 shares)	—		239			—			—			—			—			169			408
Balance at June 30, 2003	$	589	$	451,151		$	182,584		$	2,673		$	(17,017	)	$	(588	)	$	(4,549	)	$	614,843

	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.	—		—			9,274			—			—			—			—			9,274

Unrealized loss on securities available for sale, net of reclassification adjustment	—		—			—			(1,526		)	—			—			—			(1,526		)

Common stock dividend of $0.37 per share	—		—			(21,517		)	—			—			—			—			(21,517		)

Proceeds from exercise of stock options (250,916 shares)	2		1,240			—			—			—			—			—			1,242

Income tax benefit from exercise of non-incentive stock options	—		73			—			—			—			—			—			73

Recognition and retention shares forfeited	—		(108		)	—			—			—			108			—			—

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

Compensation under recognition and retention plans	—		—			—			—			—			1,446			—			1,446

Common stock held by ESOP committed to be released (30,066 shares)	—		287			—			—			—			—			164			451
Balance at June 30, 2004	$	604	$	471,100		$	157,174		$	1,003		$	(17,017	)	$	(12,406	)	$	(4,216	)	$	596,242

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

	Six months ended June 30,
	2004			2003
	(unaudited)

Cash flows from operating activities:
Net income	$	9,274		$	6,539
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,041			735
Compensation under recognition and retention plans	1,446			66
Release of ESOP shares	451			408
Depreciation and amortization	348			303
Amortization, net of accretion, of securities premiums and discounts	1,998			4,402
Amortization of deferred loan origination costs	2,211			179
Net gains from sales of securities	(961		)	(508		)
Equity interest in earnings of other investment	(339		)	(233		)
Swap agreement market valuation credit	(128		)	(37		)
Deferred income taxes	583			(488		)
Increase in:
Accrued interest receivable	(464		)	(153		)
Prepaid income taxes	(12		)	(1,376		)
Other assets	(120		)	(29		)
Increase (decrease) in:
Income taxes payable	(1,489		)	(4,970		)
Accrued expenses and other liabilities	(555		)	1,024
Net cash provided from operating activities	13,284			5,862

Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale	1,120			2,081
Proceeds from redemptions and maturities of securities available for sale	55,937			88,139
Proceeds from redemptions and maturities of securities held to maturity	120			3,311
Purchase of securities available for sale	(49,012		)	(78,454		)
Purchase of Federal Home Loan Bank of Boston stock	(3,724		)	—
Net increase in loans	(106,750		)	(148,278		)
Proceeds from sales of participations in loans	—			59
Purchase of bank premises and equipment	(274		)	(1,023		)
Distribution from other investment	272			243
Net cash used for investing activities	(102,311		)	(133,922		)

	Six months ended June 30,
	2004			2003
	(unaudited)

Cash flows from financing activities:
Increase in demand deposits and NOW, savings and money market savings accounts	$	28,875		$	34,627
Increase (decrease) in certificates of deposit	16,690			(21,198		)
Proceeds from Federal Home Loan Bank of Boston advances	357,700			—
Repayment of Federal Home Loan Bank of Boston advances	(304,481		)	(1,162		)
Increase in mortgagors’ escrow accounts	14			105
Proceeds from exercise of stock options	1,242			1,280
Income tax benefit from exercise of non-incentive stock options and dividend paid to ESOP participants	188			467
Purchase of treasury stock	—			(15,073		)
Payment of dividends on common stock	(21,517		)	(9,743		)
Net cash provided from (used for) financing activities	78,711			(10,697		)

Net decrease in cash and cash equivalents	(10,316		)	(138,757		)
Cash and cash equivalents at beginning of period	144,703			242,468
Cash and cash equivalents at end of period	$	134,387		$	103,711

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds	$	9,780		$	9,500
Income taxes	7,202			15,471

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Six months ended June 30, 2004 and 2003

(unaudited)

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

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, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

Critical Accounting Policies

Allowance for Loan Losses

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. 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.

The allowance for loan losses is based on management’s estimate of probable known and inherent credit losses existing in the loan portfolio. 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 based on projected losses due to the absence of historical loss experience. Actual delinquencies and charge-offs are compared to projections made to determine whether the allowance for indirect automobile loans needs adjustment. 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 minimize the risk related to the imprecision inherent in the estimation of the other two components of the allowance.

Premiums and Discounts on Debt Securities

Premiums and discounts on debt securities are amortized to expense and accreted to income over the life of the related debt security using the interest method. Premiums paid and discounts resulting from purchases of collateralized mortgage obligations (“CMOs”) and pass-through mortgage-backed securities (collectively referred to as “mortgage securities”) are amortized to expense and accreted to income over the estimated life of the mortgage securities using the interest method. At the time of purchase, the estimated life of mortgage securities is based on anticipated future prepayments of loans underlying the mortgage securities. The anticipated prepayments take into consideration several factors including the interest rates of the underlying loans, the contractual repayment terms of the underlying loans, the priority rights of the investor to the cash flow from the mortgage securities, the current and projected interest rate environment, and other economic conditions.

When differences arise between anticipated prepayments and actual prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. Unamortized premium or discount is adjusted to the amount that would have existed had the new effective yield been applied since purchase. The unamortized premium or discount is adjusted to the new balance with a corresponding charge or credit to interest income.

Deferred Indirect Automobile Loans Origination Costs

The difference between the rate charged by a car dealer to originate an indirect automobile loan and the “buy rate” or the rate earned by the Company is referred to as the “spread”. The computed dollar value of the spread is paid by the Company to the car dealer and included in deferred loan origination costs. Such costs are amortized as a charge to income over the life of the related loans. When a loan is prepaid, related unamortized deferred origination costs are adjusted by an accelerated charge to income based on the revised estimated life of the loan.

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 June 30,
	2004						2003
	Basic			Diluted			Basic			Diluted

Net income as reported	$	4,622		$	4,622		$	6,687		$	6,687
Total stock-based compensation expense determined using fair value accounting for stock option awards, net of taxes	(301		)	(301		)	(74		)	(74		)
Dividends on unvested restricted stock awards	(84		)	(81		)	(11		)	(8		)
Pro forma net income	$	4,237		$	4,240		$	6,602		$	6,605

Earnings per share:
As reported	$	0.08		$	0.08		$	0.12		$	0.12
Pro forma	0.07			0.07			0.11			0.11

	Six months ended June 30,
	2004						2003
	Basic			Diluted			Basic			Diluted

Net income as reported	$	9,274		$	9,274		$	6,539		$	6,539
Total stock-based compensation expense determined using fair value accounting for stock option awards, net of taxes	(644		)	(644		)	(199		)	(199		)
Dividends on unvested restricted stock awards	(376		)	(363		)	(26		)	(18		)
Pro forma net income	$	8,254		$	8,267		$	6,314		$	6,322

Earnings per share:
As reported	$	0.16		$	0.16		$	0.11		$	0.11
Pro forma	0.14			0.14			0.11			0.11

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, short-term investments and money market loan participations.

(2) Earnings Per Share Reconciliation (Dollars in thousands except per share amounts)

The following table is the reconciliation of basic and diluted earnings per share as required under SFAS No. 128 for the three months and six months ended June 30, 2004 and 2003:

	Three months ended June 30,
	2004				2003
	Basic		Diluted		Basic		Diluted

Net income	$	4,622	$	4,622	$	6,687	$	6,687

Weighted average shares outstanding	57,247,354		57,247,354		56,599,521		56,599,521
Effect of dilutive securities	—		810,458		—		975,966
Adjusted weighted average shares outstanding	57,247,354		58,057,812		56,599,521		57,575,487

Earnings per share	$	0.08	$	0.08	$	0.12	$	0.12

	Six months ended June 30,
	2004				2003
	Basic		Diluted		Basic		Diluted

Net income	$	9,274	$	9,274	$	6,539	$	6,539

Weighted average shares outstanding	57,156,108		57,156,108		57,031,545		57,031,545
Effect of dilutive securities	—		894,975		—		964,163
Adjusted weighted average shares outstanding	57,156,108		58,051,083		57,031,545		57,995,708

Earnings per share	$	0.16	$	0.16	$	0.11	$	0.11

(3) Investment Securities (Dollars in thousands)

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

	June 30, 2004
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations	$	153,718	$	89	$	474	$	153,333
Municipal obligations	5,455		—		12		5,443
Corporate obligations	8,883		135		—		9,018
Other obligations	500		—		—		500
Collateralized mortgage obligations issued by U.S. Government agencies	76,400		169		157		76,412
Mortgage-backed securities issued by U.S. Government agencies	21,825		8		258		21,575
Total debt securities	266,781		401		901		266,281
Auction rate preferred stock	5,000		—		—		5,000
Other marketable equity securities	3,147		2,076		15		5,208
Total securities available for sale	$	274,928	$	2,477	$	916	$	276,489

Securities held to maturity:
Other obligations	$	750	$	—	$	—	$	750
Mortgage-backed securities issued by U.S. Government agencies	472		29		—		501
Total securities held to maturity	$	1,222	$	29	$	—	$	1,251

	December 31, 2003
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations	$	122,522	$	802	$	—	$	123,324
Municipal obligations	6,309		—		4		6,305
Corporate obligations	9,937		313		—		10,250
Other obligations	500		—		—		500
Collateralized mortgage obligations issued by U.S. Government agencies	111,269		149		357		111,061
Mortgage-backed securities issued by U.S. Government agencies	25,167		59		43		25,183
Total debt securities	275,704		1,323		404		276,623
Auction rate preferred stock	5,000		—		—		5,000
Other marketable equity securities	3,305		3,039		15		6,329
Total securities available for sale	$	284,009	$	4,362	$	419	$	287,952

Securities held to maturity:
Other obligations	$	750	$	—	$	—	$	750
Mortgage-backed securities issued by U.S. Government agencies	593		38		—		631
Total securities held to maturity	$	1,343	$	38	$	—	$	1,381

(4) Loans (Dollars in thousands)

A summary of loans follows:

	June 30, 2004			December 31, 2003
Mortgage loans:
One-to-four family	$	121,683		$	122,524
Multi-family	340,213			339,998
Commercial real estate	307,464			312,647
Construction and development	32,685			24,813
Home equity	12,186			12,082
Second	49,232			43,650
Total mortgage loans	863,463			855,714
Commercial loans	51,101			44,207
Indirect automobile loans	312,913			211,206
Other consumer loans	2,503			2,401
Total gross loans	1,229,980			1,113,528
Unadvanced funds on loans	(61,387		)	(46,777		)
Deferred loan origination costs (fees):
Indirect automobile loans	8,813			6,254
Other	(401		)	(265		)
Loans, excluding money market loan participations	1,177,005			1,072,740
Money market loan participations	6,000			2,000
	$	1,183,005		$	1,074,740

(5) Deposits (Dollars in thousands)

A summary of deposits follows:

	June 30, 2004		December 31, 2003

Demand checking accounts	$	36,409	$	34,240
NOW accounts	63,592		62,583
Savings accounts	27,362		27,302
Money market savings accounts	277,307		303,046
Guaranteed savings accounts	51,376		—
Certificate of deposit accounts	269,440		252,750
Total deposits	$	725,486	$	679,921

(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, 2004 and December 31, 2003, such taxes amounted to $559 and $1,414, respectively.

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

At June 30, 2004, the Company had outstanding commitments to originate loans of $36,720, $10,644 of which were commercial real estate and multi-family mortgage loans. Unused lines of credit available to customers were $26,347, $21,831 of which were equity lines of credit.

The Company 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 Company 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 Company 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, 2004 and 2003 was $64, $59, $123 and $115, respectively. Changes in the fair value of the outstanding swap agreement are recognized as charges or credits to earnings. For the three months and six months ended June 30, 2004 and 2003, $88, $18, $128 and $37, respectively, were credited to pre-tax earnings.

(8) Dividend Declaration

On July 15, 2004, the Board of Directors of the Company approved a quarterly dividend of $0.085 per share and an extra dividend of $0.20 per share payable on August 16, 2004 to stockholders of record on July 30, 2004.

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

Activity under the Company’s stock option plans for the six months ended June 30, 2004 was as follows:

Options outstanding at January 1, 2004	3,509,628
Options exercised at $4.944 per share	(251,216	)
Options forfeited at $14.95 per share	(7,500	)
Options outstanding at June 30, 2004	3,250,912

Exercisable at June 30, 2004:
$4.944 per share	1,854,495
$11.00 per share	5,393
$14.95 per share	531,000
$15.42 per share	3,527
	2,394,415

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 June 30, 2004, 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 Option Plan, dividend equivalent rights amounting to $375 were paid during the three months ended March 31, 2004 to holders of unexercised options as a result of the $0.20 per share extra dividend paid to stockholders on February 16, 2004.

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, 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 June 30, 2004, the number of shares available for award under the 1999 RRP and the 2003 RRP were 29,774 shares and 98,000 shares, respectively.

Expense for shares awarded is recognized over the vesting period at the fair value of the shares on the date they were awarded. Total expense for the RRP plans amounted to $718, $26, $1,446 and $66 for the three months and six months ended June 30, 2004 and 2003, respectively. The total expense of the RRP plans is expected to be $1,448 for the second half of 2004, $2,753 in 2005 and 2006, $2,651 in 2007, $2,600 in 2008 and $234 thereafter.

(10) 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 six months ended June 30, 2003 and an estimate of the components of net periodic postretirement benefit costs for the three months and six months ended June 30, 2004:

	Three months ended June 30,				Six months ended June 30,
	2004		2003		2004		2003

Service cost	$	32	$	24	$	60	$	49
Interest cost	18		16		34		32
Transition obligation	6		5		10		9
Actuarial loss	5		—		6		—
Net periodic benefit costs	$	61	$	45	$	110	$	90

Postretirement benefits costs in the above table for the three months and six months ended June 30, 2004 are based on the assumption that benefits currently offered will be changed before the end of 2004. The Company is in the process of evaluating postretirement benefits and expects to adjust the benefits in a way that will reduce costs in 2004 and thereafter. Accordingly, the Company charged $110 to expense for the six months ended June 30, 2004 instead of $167 that otherwise would have been charged to expense if no change in benefits was contemplated.

Benefits paid for the six months ended June 30, 2004 and 2003 amounted to $11 and $10, respectively.

(11) Income Taxes (Dollars in thousands)

160 Associates, Inc. (“Associates”), a wholly-owned subsidiary of Brookline Bank and 99.9% owner of a real estate investment trust (“REIT”) subsidiary, received in 2002 from the Department of Revenue of the Commonwealth of Massachusetts (“DOR”) Notices of Assessments for state excise taxes of $3,930 plus interest of $811. The assessments were based on a desk review of the financial institution excise returns filed by Associates for its 1999, 2000 and 2001 tax years. It was expected that the DOR would submit another Notice of Assessment for state excise taxes for the 2002 tax year and it was estimated that such assessment would amount to $3,748. The DOR contended that dividend distributions from a REIT are not deductible in determining Massachusetts taxable income. Associates believed that the Massachusetts statute that provided for a dividend received deduction equal to 95% of certain dividend distributions applied to distributions made by the REIT subsidiary to Associates. Accordingly, the Company made no provision in its consolidated financial statements through December 31, 2002 for the amounts assessed or additional amounts that might be assessed relating to the years 1999 through 2002.

On March 5, 2003, a new law was enacted denying favorable tax treatment for dividend distributions from REITs in determining Massachusetts taxable income not only for the year 2003 and thereafter, but also retroactively for tax years 1999 through 2002. While the Company disputed the retroactive tax assessments, it was obliged under U.S. generally accepted accounting principles to provide for the taxes and interest resulting from the new law at the time of its enactment. Accordingly, $5,515 was charged to earnings ($2,788 on an after-tax basis) in the three months ended March 31, 2003 to recognize the liabilities for taxes and interest resulting from the retroactive application of the new law to the Company=s REIT subsidiary for the years 1999 through 2002. On June 23, 2003, the Company signed an agreement with the Commissioner of Revenue of the Commonwealth of Massachusetts settling all disputes relating to the tax treatment of the Company’s REIT subsidiary. The Company paid $4,341 as full settlement of the dispute, resulting in an after-tax credit to earnings of $2,727 in the three month period ended June 30, 2003.

(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 1 institution”) 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 June 30, 2004, the Company was authorized to repurchase up to 1,602,233 shares of its common stock. The repurchase of additional shares would require prior authorization of the Board of Directors of the Company.

As a result of the execution of a definitive agreement to acquire Mystic Financial, Inc. on July 7, 2004 (see note 13 below), the Company is prohibited from repurchasing shares of its common stock until after the shareholders of Mystic Financial, Inc. approve the contemplated transaction.

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 $55,749 at December 31, 2003.

(13) Announcement of Acquisition of Mystic Financial, Inc.

On July 7, 2004, the Company and Mystic Financial, Inc. (“Mystic”) announced the execution of a definitive agreement under which the Company will acquire Mystic in a transaction valued at approximately $65.1 million. Mystic shareholders will be entitled to receive merger consideration in shares of Company stock, cash or a combination thereof subject to an allocation that results in the conversion of 40% of Mystic’s shares into the right to receive cash valued at $39.00 per share and 60% of Mystic’s shares into the right to receive shares of Company stock at a fixed exchange ratio of 2.6786, based on the Company’s 10 day average closing price ending July 1, 2004 of $14.56 per share. Mystic options will be cashed out for the in the money value of such options. The aggregate merger consideration consists of approximately 2.52 million shares of Company common stock and approximately $28.4 million in cash.

The acquisition, which is expected to be completed in January of 2005, requires regulatory approval and an affirmative vote by the stockholders of Mystic.

Mystic, headquartered in Medford, Massachusetts, operates Medford Co-operative Bank’s seven branches in the towns of Medford, Arlington, Bedford and Malden, Massachusetts. As of June 30, 2004, Mystic had assets of $440.8 million, deposits of $351.4 million, loans of $311.8 million and stockholders’ equity of $26.7 million.

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, market acceptance of the Company’s pricing, products and services, and completion of the acquisition of Mystic Financial, Inc. announced on July 7, 2004. (See note 13 to the unaudited consolidated financial statements included on page 15 herein).

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 Agencies.

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 policies relate to the allowance for loan losses, the accounting for premiums and discounts on debt securities and the accounting for deferred indirect automobile loan origination costs. See note 1 to the unaudited consolidated financial statements included on pages 8 and 9 herein for a description of those accounting policies and the Accelerated Amortization of Deferred Loan Origination Costs, Accelerated Amortization of Investment Premiums and the Non-Performing Assets, Restructured Loans and Allowance for Loan Losses sub-sections appearing on pages 21, 22, 24 and 25 herein.

Executive Summary

Operating Highlights

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
	(In thousands except per share amounts)

Net interest income	$	12,887		$	10,712		$	25,062		$	23,136
Provision for loan losses	711			360			1,041			735
Non-interest income	1,229			1,094			3,110			2,053
Recognition and retention plans	718			26			1,446			66
Dividend equivalent rights expense	—			—			375			—
Other non-interest expenses	4,827			4,554			9,565			8,647
Income before income taxes	7,860			6,866			15,745			15,741
Provision for income taxes	3,238			2,906			6,471			6,414
Retroactive (credit) assessment related to REIT	—			(2,727		)	—			2,788
Net income	4,622			6,687			9,274			6,539

Basic earnings per common share	$	0.08		$	0.12		$	0.16		$	0.11
Diluted earnings per common share	0.08			0.12			0.16			0.11

Interest rate spread	2.42		%	1.93		%	2.35		%	2.10		%
Net interest margin	3.29		%	3.06		%	3.24		%	3.29		%

Financial Condition Highlights

	At June 30, 2004			At December 31, 2003			At June 30, 2003
	(In thousands)

Total assets	$	1,610,218		$	1,524,034		$	1,414,208
Net loans	1,166,043			1,058,545			935,678
Deposits	725,486			679,921			662,754
Borrowed funds	273,738			220,519			123,738
Stockholders’ equity	596,242			606,684			614,843

Non-performing assets	$	322		$	133		$	29

Stockholders’ equity to total assets	37.03		%	39.81		%	43.48		%

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

• Improvement in net interest income and interest rate spread in the quarterly and six month periods ended June 30, 2004 versus the comparable periods ended June 30, 2003

• Growth of the indirect automobile lending business (loans outstanding - $313 million at June 30, 2004 compared to $274 million at March 31, 2004, $211 million at December 31, 2003 and $84 million at June 30, 2003)

• Accelerated amortization of deferred loan origination costs as a result of loan prepayments - $322,000 in the 2004 quarterly period and $662,000 in the 2004 six month period; none in the 2003 periods

• Reduction in accelerated amortization of premiums paid to purchase mortgage securities - $232,000 credit to income in the 2004 quarterly period compared to $1,680,000 of accelerated amortization in the 2003 quarterly period; $125,000 versus $1,695,000, respectively, in the six month periods ended June 30, 2004 and 2003

• Higher provision for loan losses of $351,000 in the comparable quarterly periods and $306,000 in the comparable six month periods

• Increased expense of recognition and retention plans - $718,000 in the 2004 quarterly period versus $26,000 in the 2003 quarterly period and $1,446,000 in the 2004 six month period versus $66,000 in the 2003 six month period

• $375,000 of dividend equivalent rights expense in the 2004 quarterly period ended March 31, 2004

• Fluctuating non-interest income from mortgage loan prepayment fees - $278,000 versus $339,000 in the 2004 and 2003 quarterly periods; $1,141,000 versus $517,000 in the 2004 and 2003 six month periods

• A $2,727,000 after-tax credit in the 2003 quarterly period and a $2,788,000 after-tax charge in the 2003 six month period related to the state tax treatment of the Company’s real estate investment trust (“REIT”) subsidiary

• Reduction in stockholders’ equity in the 2004 six month period due to payment of an extra dividend to stockholders of $0.20 per share ($11.7 million)

Detailed commentary on each of the items listed above follows.

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

The following table sets 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 six months ended June 30, 2004 and 2003. Average balances are derived from daily average balances and yields include fees and costs which are considered adjustments to yields.

	Three months ended June 30,
	2004							2003
	Average balance			Interest (1)		Average yield/ cost		Average balance			Interest (1)		Average yield/ cost
	(Dollars in thousands)
Assets
Interest-earning assets:
Short-term investments	$	118,387		$	305	1.03	%	$	120,409		$	350	1.17	%
Debt securities (2) (4)	273,969			1,951		2.85		365,122			914		1.00
Equity securities (2)	25,202			167		2.63		21,241			202		3.81
Mortgage loans (3)	817,699			12,032		5.89		815,533			12,873		6.31
Money market loan participations	640			2		1.15		1,132			4		1.42
Other commercial loans (3)	30,916			434		5.62		23,961			352		5.88
Indirect automobile loans (3) (5)	303,983			2,993		3.95		56,441			632		4.49
Other consumer loans (3)	2,341			44		7.52		2,999			57		7.60
Total interest-earning assets (6)	1,573,137			17,928		4.55	%	1,406,838			15,384		4.38	%
Allowance for loan losses	(16,501		)					(15,594		)
Non-interest earning assets	29,442							28,596
Total assets	$	1,586,078						$	1,419,840

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
NOW accounts	$	62,666		22		0.14	%	$	60,962		26		0.17	%
Savings accounts	74,713			319		1.71		20,777			38		0.73
Money market savings accounts	282,121			842		1.20		294,448			1,214		1.65
Certificate of deposit accounts (7)	261,911			1,649		2.53		257,248			1,946		3.03
Total deposits	681,411			2,832		1.67		633,435			3,224		2.04
Borrowed funds	259,327			2,174		3.32		123,804			1,409		4.50
Total interest bearing liabilities	940,738			5,006		2.13	%	757,239			4,633		2.45	%
Non-interest-bearing demand checking accounts	35,286							28,494
Other liabilities	13,744							20,730
Total liabilities	989,768							806,463
Stockholders’ equity	596,310							613,377
Total liabilities and stockholders’ equity	$	1,586,078						$	1,419,840
Net interest income (tax equivalent basis)/interest rate spread				12,922		2.42	%				10,751		1.93	%
Less adjustment of tax exempt income				35							39
Net interest income				$	12,887						$	10,712
Net interest margin						3.29	%						3.06	%

(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 income on debt securities in the 2004 period is $232 of income resulting from adjustment of the amortization of premiums on mortgage securities. Excluding this credit, the yield on debt securities in the 2004 period would have been 2.51%. Included in interest income in the 2003 period is $1,680 of accelerated amortization of premiums on mortgage securities. Excluding this charge, the yield on debt securities in the 2003 period would have been 2.84%.

(5) Included in interest income on indirect automobile loans in the 2004 period is $322 of accelerated amortization of deferred loan origination costs due to prepaid loan payoffs. Excluding this charge, the yield on the indirect automobile loan portfolio would have been 4.37% in the 2004 period.

(6) Excluding the adjustments on debt securities and indirect automobile loans noted above, the yield on interest-earning assets would have been 4.57% in the 2004 period and 4.85% in the 2003 period.

(7) Included in interest expense in the 2004 period is a $33 reduction of expense due to a rate adjustment. Excluding this adjustment, the cost of certificates of deposit in the 2004 period would have been 2.58% and the cost of interest-bearing liabilities would have been 2.15%.

	Six months ended June 30,
	2004							2003
	Average balance			Interest (1)		Average yield/ cost		Average balance			Interest (1)		Average yield/ cost
	(Dollars in thousands)
Assets
Interest-earning assets:
Short-term investments	$	119,873		$	603	1.01	%	$	155,613		$	927	1.20	%
Debt securities (2) (4)	275,318			3,466		2.52		368,126			4,167		2.26
Equity securities (2)	24,657			342		2.78		22,052			431		3.92
Mortgage loans (3)	824,032			24,283		5.89		804,413			25,692		6.39
Money market loan participations	1,183			7		1.19		2,519			17		1.36
Other commercial loans (3)	30,678			860		5.61		23,400			696		5.95
Indirect automobile loans (3) (5)	275,263			5,328		3.88		29,988			661		4.44
Other consumer loans (3)	2,290			87		7.60		3,151			121		7.68
Total interest-earning assets (6)	1,553,294			34,976		4.49	%	1,409,262			32,712		4.64	%
Allowance for loan losses	(16,347		)					(15,392		)
Non-interest earning assets	34,389							27,845
Total assets	$	1,571,336						$	1,421,715

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
NOW accounts	$	61,956		42		0.14	%	$	63,088		62		0.20	%
Savings accounts	56,521			414		1.47		18,895			73		0.78
Money market savings accounts	288,022			1,780		1.24		286,385			2,457		1.73
Certificate of deposit accounts (7)	258,463			3,293		2.56		261,371			4,074		3.14
Total deposits	664,962			5,529		1.67		629,739			6,666		2.13
Borrowed funds (8)	256,243			4,313		3.33		123,945			2,830		4.57
Total interest bearing liabilities	921,205			9,842		2.14	%	753,684			9,496		2.54	%
Non-interest-bearing demand checking accounts	34,060							27,759
Other liabilities	14,745							18,537
Total liabilities	970,010							799,980
Stockholders’ equity	601,326							621,735
Total liabilities and stockholders’ equity	$	1,571,336						$	1,421,715
Net interest income (tax equivalent basis)/interest rate spread				25,134		2.35	%				23,216		2.10	%
Less adjustment of tax exempt income				72							80
Net interest income				$	25,062						$	23,136
Net interest margin						3.24	%						3.29	%

(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 income on debt securities in the 2004 period is $125 of accelerated amortization of premiums on mortgage securities. Excluding this charge, the yield on debt securities would have been 2.61%. Included in interest income on debt securities in the 2003 period is $1,695 of accelerated amortization of premiums on mortgage securities. Excluding this charge, the yield on debt securities would have been 3.18%.

(5) Included in interest income on indirect automobile loans in the 2004 period is $662 of accelerated amortization of deferred loan origination costs due to prepaid loan payoffs. Excluding this charge, the yield on the indirect automobile loan portfolio would have been 4.36%.

(6) Excluding the adjustments noted above, the yield on interest-earning assets would have been 4.59% in the 2004 period and 4.88% in the 2003 period.

(7) Included in interest expense in the 2004 period is a $27 reduction of expense due to a rate adjustment. Excluding this adjustment, the cost of certificates of deposit in the 2004 period would have been 2.58% and the cost of interest-bearing liabilities would have been 2.15%.

(8) The 2003 period includes a $25 interest charge on a prepaid FHLB advance that relates to a prior period.

Highlights from the tables on the two preceding pages follow.

• Net interest income rose $2,175,000, or 20.3%, in the quarterly periods and $1,926,000, or 8.3%, in the six month periods due to a combination of asset growth and improved interest rate spread.

• The average balances of total interest-earning assets increased $166 million, or 11.8%, in the quarterly periods and $144 million, or 10.2%, in the six month periods. The increase was attributable to indirect automobile lending which commenced in February 2003 and grew to $313 million at June 30, 2004. Part of this growth was offset by a reduction in average balances invested in debt securities and short-term investments.

• A change in the mix of earning assets contributed to the improvement in net interest income as yields on loans generally exceed yields on investments. Loans represented 73.0% of average total interest-earning assets in the 2004 six month period compared to 61.3% in the 2003 six month period.

• Interest rate spread improved in the quarterly and six month periods as the decline in the average rates paid on deposits and borrowed funds was greater than the decline in the average yields earned on interest-earning assets. Part of the improvement was due to considerably less accelerated amortization of premiums on mortgage securities in the 2004 periods than in the 2003 periods.

• Net interest margin, which is net interest income on a tax equivalent basis divided by interest-earning assets, improved in the quarterly periods due to higher average yields on earning assets. The higher average yields resulted from the change in the mix of earning assets and the reduction in accelerated amortization of premiums on mortgage securities mentioned above. Yields had been steadily shrinking over the past few years due to a continually declining interest rate environment.

As we have stated in previous reports, the interest rate environment of the past few years has been the lowest in over forty years. Since a high percent of the Company’s assets (ranging from 38% to 44% in the 2004 and 2003 quarterly and six month periods presented above) are funded by stockholders’ equity for which there is no charge to expense, declining rates cause a greater reduction in interest income from lower asset yields than the reduction in interest expense from lower rates paid on deposits and borrowed funds. On June 30, 2004, the Federal Reserve increased the federal funds rate for overnight borrowings between banks for the first time since May 16, 2000 from 1.00% to 1.25%. From May 2000 through June 2004, the federal funds rate had declined from 6.50% to 1.00%; it remained at 1.00% since June 25, 2003. While rising rates will likely have a positive impact on the Company’s net interest income and net interest margin, future trends in interest rates are dependent on many factors. Continuation of a low interest rate environment, or further reductions in interest rates, would likely have a negative impact on the Company’s future net interest income and net interest margin.

Indirect Automobile Lending Business

As previously reported, the Company commenced originating indirect automobile loans in February 2003. The portfolio grew to $211 million at the end of 2003 and $313 million at June 30, 2004. The Company does business with over 100 dealerships. The Company has concentrated on originating loans to customers with good credit histories; there is no emphasis on “sub-prime” lending. The average credit score of all indirect automobile loans outstanding at June 30, 2004 was 729 and the total of loans with credit scores of 660 or lower was less than 10%. The total of loans delinquent over 30 days at June 30, 2004 was $2,205,000, or 0.70% of the portfolio.

Regarding indirect automobile lending, there is a strong correlation between interest rates offered and the degree of credit risk. In general, the higher the credit scores of borrowers, the lower the interest rates earned. Also, the level of charge-offs, or loan losses, would normally be lower when credit scores are higher. In entering the indirect automobile loan business, the Company opted to emphasize credit quality rather than profit maximization. Currently, this lending area is profitable and is expected to increase its contribution to the overall profitability of the Company in the future. Any efforts to enhance the rate of profitability of this area of lending in the future will be initiated in a deliberate manner so that the risk profile of the loan portfolio does not increase suddenly and significantly.

Accelerated Amortization of Deferred Loan Origination Costs

During the three month and six month periods ended June 30, 2004, approximately $12.0 million and $21.4 million, respectively, of indirect automobile loans were prepaid in entirety due in part to aggressive loan promotions by credit unions and banks and the ability of borrowers with higher credit scores (which represent much of the Company’s customer base) to refinance their debt. The prepayments resulted in $322,000 and $662,000, respectively, of accelerated amortization of deferred loan origination costs being charged to interest income in the three month and six month periods ended June 30, 2004.

In connection with the origination of indirect automobile loans, the interest rate charged to the borrower by the car dealer usually exceeds the “buy rate” or the rate earned by the Company. The difference between the two rates is referred to as the “spread”. The computed dollar value of the spread is prepaid by the Company to the car dealer and included in deferred loan origination costs. Such costs, which are generally subject to rebate in the event the underlying loans are prepaid within a few months, are amortized as a charge to income over the life of the related loans. In a low or declining interest rate environment, the level of prepayments is likely to be higher than normal.

Accelerated Amortization of Investment Premiums

In the second half of 2002 and the first quarter of 2003, the Company invested a substantial part of the proceeds from the 2002 stock offering in collateralized mortgage obligations and pass-through mortgage-backed securities (collectively “mortgage securities”) with expected maturities in the two to three year range. Because of the declining interest rate environment, the securities were purchased at a premium. Premiums are amortized to expense as a reduction in yield over the estimated life of the securities.

The Company’s investment in mortgage securities increased from $109.1 million at June 30, 2002 to $315.0 million at March 31, 2003. From that date, the mortgage securities portfolio declined to $137.0 million at December 31, 2003, $125.0 million at March 31, 2004 and $98.7 million at June 30, 2004 as a result of unprecedented levels of prepayment and normally scheduled payments. The prepayments shortened the estimated remaining life of the securities significantly. This necessitated the accelerated expensing of the premiums paid to purchase the securities.

Prepayments, which started to subside in the latter part of 2003, picked up once again in the first quarter of 2004 and slowed down in the second quarter of 2004. As a result, accelerated amortization of investment premiums charged to interest income was $1,680,000 and $1,695,000, respectively, in the three month and six month periods ended June 30, 2003 and $357,000 in the three month period ended March 31, 2004. The slow down in prepayments in the three month period ended June 30, 2004 resulted in a reversal of prior amortization and a credit to income of $232,000 in that period. The remainder of unamortized premium on the mortgage securities portfolio at June 30, 2004 was $1,445,000. Of that amount, $615,000 is scheduled to amortize over the remainder of 2004. Higher than anticipated prepayments could require accelerated expensing of the remaining balance of unamortized premium in 2004. Conversely, slower than anticipated prepayments could result in less expensing in 2004 of unamortized premium.

Provision for Loan Losses

The provisions for loan losses charged to earnings in the three month periods ended June 30, 2004 and 2003 were $711,000 and $360,000, respectively; charges to earnings in the six month periods ended on those dates were $1,041,000 and $735,000, respectively. The increases were attributable primarily to growth of the loan portfolio, most of which related to the indirect automobile loan portfolio. Net charge-offs of $275,000 in the six months ended June 30, 2004 were entirely in the indirect automobile loan portfolio except for an insignificant amount of other consumer loans. No charge-offs were experienced in the mortgage and commercial loan portfolios. There were net loan recoveries of $26,000 in the six months ended June 30, 2003.

See the sub-section Non-Performing Assets, Restructured Loans and Allowance for Loan Losses on pages 24 and 25 herein for additional information about the collectibility of the loan portfolio.

Recognition and Retention Plans

The Company has two recognition and retention plans, the “1999 RRP” and the “2003 RRP”. Expense for shares awarded under the plans is recognized over the vesting period at the fair value of the shares on the date they were awarded. As a result of shares awarded on October 16, 2003 under the 2003 RRP, expense for the recognition and retention plans was $718,000 in the 2004 quarterly period compared to $26,000 in the 2003 quarterly period and $1,446,000 and $66,000, respectively, for the six month periods ended June 30, 2004 and 2003. See note 9 to the unaudited consolidated financial statements on page 13 herein for additional information about the plans.

Dividend Equivalent Rights Expense

In accordance with the terms of the 1999 Stock Option Plan, dividend equivalent rights amounting to $375,000 were paid to holders of unexercised options awarded under that plan as a result of the $0.20 per share extra dividend paid to stockholders of the Company on February 16, 2004. An additional $365,000 will be charged to expense in August 2004 when the $0.20 per share extra dividend recently declared is paid to stockholders.

Mortgage Loan Prepayment Fees

Fees credited to income from prepayment of mortgage loans in the three month periods ended June 30, 2004 and 2003 were $278,000 and $339,000, respectively; credits to income in the six month periods ended June 30, 2004 and 2003 were $1,141,000 and $517,000, respectively. The higher fees in the 2004 six month period resulted primarily from approximately $30.8 million of mortgage loan prepayments and a $4.0 million pay down of a construction loan in the three month period ended March 31, 2004. Much of the mortgage loan prepayments resulted from the sale of underlying multi-family and commercial real estate properties.

Real Estate Investment Trust (“REIT”) Tax Dispute

As explained more fully in note 11 to the unaudited consolidated financial statements on page 14 herein, $5,515,000 ($2,788,000 on an after-tax basis) was charged to earnings in the 2003 first quarter to recognize the liabilities for taxes and interest relating to a dispute with the Department of Revenue of the Commonwealth of Massachusetts over the state tax treatment of the Company’s REIT subsidiary. The dispute was resolved on June 23, 2003 resulting in an after-tax credit to earnings of $2,727,000 in the second quarter of 2003.

Reduction in Stockholders’ Equity

Stockholders’ equity declined from $614.8 million at June 30, 2003 to $606.7 million at December 31, 2003 and $596.2 million at June 30, 2004 due primarily to two payments of extra dividends of $0.20 per share to stockholders in August 2003 and February 2004. Such dividend payments exceeded net earnings in the six month periods ended December 31, 2003 and June 30, 2004. In approving the extra dividends, the Board of Directors considered the capital requirements of the Company, potential future business initiatives and economic factors. While it is the intent of the Board of Directors for the foreseeable future to authorize payment of an extra dividend of $0.20 per share semi-annually, the payment and magnitude of any future dividends will be considered in light of changing opportunities to deploy capital effectively, operating trends, future income tax rates and general economic conditions.

Other Operating Highlights

Securities Gains. Gains from sales of marketable equity securities in the three month periods ended June 30, 2004 and 2003 were $381,000 and $181,000 respectively; gains in the six month periods ended June 30, 2004 and 2003 were $961,000 and $508,000 respectively.

Non-Interest Expense. Excluding expenses for recognition and retention plans and dividend equivalent rights, other non-interest expenses increased $273,000, or 6.0%, in the 2004 second quarter compared to the 2003 second quarter and $918,000, or 10.6%, in the first half of 2004 compared to the first half of 2003. The increases were due primarily to operating expenses related to the indirect automobile loan business and the opening of a new branch in the fall of 2003.

Deposits and Borrowings. Deposits increased $45.6 million, or 6.7%, in the first half of 2004 due primarily to special promotions and a new branch that opened in the fall of 2003. Borrowings from the Federal Home Loan Bank of Boston increased from $123.7 million at June 30, 2003 to $220.5 million at December 31, 2003 and $273.7 million at June 30, 2004. The borrowings were obtained to fund growth of the indirect automobile loan portfolio and to lock in interest spread on part of the loans originated during those six month periods. New borrowings in the 2004 first quarter included $25.0 million obtained for two years at an average interest rate of 2.07% and $2.0 million for four years at an average interest rate of 2.83%. New borrowings in the 2004 second quarter included $15.0 million for two years at 3.20% and $1.7 million for twenty years at 5.48%. An additional $10.0 million was borrowed during the first half of 2004 with maturities ranging from one week to three weeks.

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:

	June 30, 2004			December 31, 2003
	(Dollars in thousands)

Non-accrual loans:
Indirect automobile loans	$	168		$	49
Other consumer loans	—			1
Total non-accrual loans	168			50
Repossessed vehicles	154			83
Total non-performing assets	$	322		$	133

Restructured loans	$	—		$	—

Allowance for loan losses	$	16,962		$	16,195

Allowance for loan losses as a percent of total loans	1.43		%	1.51		%
Non-accrual loans as a percent of total loans	0.01		%	—
Non-performing assets as a percent of total assets	0.02		%	0.01		%

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. There were no impaired loans (excluding non-accrual loans) at June 30, 2004 and December 31, 2003.

The Company increased its allowance for loan losses by charging $1,041,000 to earnings in the six months ended June 30, 2004 and $735,000 in the six months ended June 30, 2003. The charges to earnings were attributable primarily to loan growth. Gross loans outstanding increased $116.5 million and $151.4 million during the six month periods ended June 30, 2004 and 2003, respectively. Of those amounts, $101.7 million and $84.4 million, respectively, related to the indirect automobile loan portfolio.

The average life of indirect automobile loans is estimated to be approximately two and one-half years, or 30 months, and the projected level of net charge-offs over that time period is estimated to equal 1.25% of loan originations, or 0.50% on an annualized basis. The monthly allowance for indirect automobile loan losses is established by multiplying each month’s loan originations times 1.25% and dividing the resulting amount by 30 months. Monthly additions are reduced to take into consideration loan pay-offs before their contractual maturity. The resulting amount is added to the allowance each month for the following 30 months. Application of this methodology causes higher monthly additions to the allowance when the portfolio is growing and resulted in additions charged to the provision for loan losses of $501,000 and $94,000 for the three months ended June 30, 2004 and 2003, respectively, and $881,000 and $100,000 for the six months ended June 30, 2004 and 2003, respectively. This methodology will be used until the indirect automobile loan portfolio becomes seasoned and growth of the portfolio slows down to a more normal annualized rate in the 5% to 10% range. Actual net charge-offs are being monitored and if the rate experienced is not in line with the projected rate, the monthly additions to the allowance will be adjusted accordingly.

During the six months ended June 30, 2004 and 2003, loan charge-offs were $319,000 and $21,000, respectively, and recoveries of loans previously charged off were $45,000 and $45,000, respectively. Of the 2004 charge-offs and recoveries, $310,000 and $40,000, respectively, related to indirect automobile loans. Charge-offs, net of recoveries, for the six months ended June 30, 2004 equaled 0.23% of the average total amount of indirect automobile loans outstanding during that period. Total indirect automobile loans delinquent over 30 days increased from $988,000, or 0.47% of the portfolio, at December 31, 2003 to $2,205,000, or 0.70% of the portfolio, at June 30, 2004. The rate of delinquencies and net charge-offs is expected to rise from the levels experienced to date due to the normal lag in time between loan origination and when a portion of the borrowers experience difficulty in meeting scheduled loan payments. The rates of delinquencies and net charge-offs experienced to date are in line with those projected when the Company entered this business line in early 2003. Future rates will be influenced by the economy and other factors sensitive to consumers.

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.

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. Also taken into consideration are interest rate swap agreements entered into by the Company.

At June 30, 2004, interest-earning assets maturing or repricing within one year amounted to $660.4 million and interest-bearing liabilities maturing or repricing within one year (net of a $5.0 million interest rate swap agreement) amounted to $487.9 million, resulting in a cumulative one year positive gap position of $172.5 million, or 10.7% of total assets. At December 31, 2003, the Company had a positive one year cumulative gap position of $98.2 million, or 6.4% of total assets.

The Company’s cumulative interest sensitivity gap of assets and liabilities with expected maturities of more than three years changed from $430.3 million, or 28.2%, of total assets at December 31, 2003 to $393.8 million, or 24.5%, of total assets at June 30, 2004. The dollar decrease resulted from having a significant part of the Company’s loan originations in the indirect automobile loan sector where the average life of the loans is less than three years.

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.

During the past few years, the combination of low interest rates on deposit products and the attraction of alternative investments such as mutual funds and annuities resulted in a slower rate of growth. Deposits increased $45.6 million, or 6.7%, in the six months ended June 30, 2004 due primarily to special promotions and the opening of a new branch in the fourth quarter of 2003. Based on its monitoring of historic deposit trends and its current pricing strategy for deposits, management believes the Company will retain a large portion of its existing deposit base.

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 June 30, 2004 amounted to $273.7 million and the Company had the capacity to increase that amount to $444.8 million. It is expected that net loan growth over the remainder of 2004 could be in the range of $100 million. If that is achieved, approximately half of the growth would likely have to be funded by additional advances from the FHLB. The amount ultimately borrowed will depend on actual loan growth and the extent to which deposits grow. Use of borrowings from the FHLB will result in more interest expense than what would normally be incurred if loan growth was funded solely by deposits. Beyond 2004, the capacity to grow the loan portfolio will be affected by the ability of the Company to obtain funds at reasonable rates of interest. Since there are limits to the amounts the Company can borrow from the FHLB, other sources of funding might have to be pursued. If market conditions make such sources unattractive, the Company might have to restrict its rate of loan growth.

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 June 30, 2004, such assets amounted to $155.4 million, or 9.7% of total assets.

At June 30, 2004, Brookline Bank exceeded all regulatory capital requirements. The Bank’s Tier I capital was $431.0 million, or 29.8% of adjusted assets. The minimum required Tier I capital ratio is 4.00%.

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 (page 25 herein) and pages 14 through 16 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, 2003.

For quantitative information about market risk, see pages 14 through 16 of the Company’s 2003 Annual Report.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure 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 evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) at the end of the period (the “Evaluation Date”). Based upon that evaluation, the chief executive officer and the chief financial officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company and its consolidated subsidiaries required to be included in the Company’s periodic SEC filings.

(b) Changes in Internal Controls

There were no significant changes made in the Company’s internal controls during the period covered by this report or, to such officers’ knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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. Changes in Securities

Not applicable.

Item 3. Default Upon Senior Securities

Not applicable.

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

On April 15, 2004, the Company held its annual meeting of stockholders for the purpose of the election of five Directors to three year terms and ratification of the appointment of KPMG LLP as auditors for the Company for the year ending December 31, 2004.

The number of votes cast at the meeting was as follow:

	Number of Votes For	Number of Votes Against
Election of Directors:
David C. Chapin	51,587,848	1,541,004
John L. Hall, II	52,159,942	968,910
Hollis W. Plimpton, Jr.	52,093,121	1,035,731
Rosamond B. Vaule	52,114,524	1,014,328
Franklin Wyman, Jr.	52,040,147	1,088,705

	Number of Votes For	Number of Votes Against	Number of Votes Abstained

Ratification of appointment of auditors	52,006,635	1,003,396	58,821

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

Exhibits

Exhibit 10.6		Eighth amendment to the Employee Stock Option Plan

Exhibit 11		Statement Re Computation of Per Share Earnings. The required information is included in Part I under Notes to Unaudited Consolidated Financial Statements, Note 2, on page 10 herein.

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.

Reports on Form 8-K

A Form 8-K was filed on April 16, 2004 to furnish a copy of the press release announcing the Company’s earnings for the 2004 first quarter and the approval by its Board of Directors of a regular quarterly dividend of $0.085 per share payable on May 17, 2004 to stockholders of record on April 30, 2004.

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: August 3, 2004	By:	/s/ Richard P. Chapman, Jr.
		Richard P. Chapman, Jr.
		President and Chief Executive Officer


Date: August 3, 2004	By:	/s/ Paul R. Bechet
		Paul R. Bechet
		Senior Vice President, Treasurer and Chief Financial Officer