BROOKLINE BANCORP INC - 10-Q Quarterly Report

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

(In thousands except share data)

	March 31,			December 31,
	2005			2004
	(unaudited)
ASSETS
Cash and due from banks	$	10,491		$	8,937
Short-term investments	133,549			127,928
Securities available for sale	366,374			260,852
Securities held to maturity (market value of $895 and $914, respectively)	875			889
Restricted equity securities	22,557			17,444
Loans	1,586,884			1,269,637
Allowance for loan losses	(21,383		)	(17,540		)
Net loans	1,565,501			1,252,097
Other investment	4,438			4,456
Accrued interest receivable	8,189			5,801
Bank premises and equipment, net	11,647			3,900
Other real estate owned	1,400			—
Deferred tax asset	8,434			9,980
Prepaid income taxes	1,513			270
Core deposit intangible	11,249			—
Goodwill	36,605			—
Other assets	2,172			1,945
Total assets	$	2,184,994		$	1,694,499

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	1,143,461		$	773,958
Borrowed funds	397,552			320,171
Subordinated debt	12,310			—
Mortgagors’ escrow accounts	5,961			4,464
Accrued expenses and other liabilities	13,402			10,893
Total liabilities	1,572,686			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; 62,996,235 shares and 60,477,939 shares issued, respectively	630			605
Additional paid-in capital	511,768			471,799
Retained earnings, partially restricted	132,196			144,081
Accumulated other comprehensive income (loss)	(1,028		)	560
Treasury stock, at cost – 1,336,799 shares and 1,335,299 shares, respectively	(17,040		)	(17,017		)
Unearned compensation - recognition and retention plans	(10,241		)	(10,963		)
Unallocated common stock held by ESOP – 729,355 shares and 743,221 shares, respectively	(3,977		)	(4,052		)
Total stockholders’ equity	612,308			585,013
Total liabilities and stockholders’ equity	$	2,184,994		$	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 March 31,
	2005		2004
	(unaudited)
Interest income:
Loans	$	21,724	$	15,059
Debt securities	2,267		1,506
Marketable equity securities	74		78
Restricted equity securities	219		70
Short-term investments	846		298
Total interest income	25,130		17,011

Interest expense:
Deposits	4,559		2,697
Borrowed funds	3,382		2,139
Subordinated debt	135		—
Total interest expense	8,076		4,836
Net interest income	17,054		12,175
Provision for loan losses	654		330
Net interest income after provision for loan losses	16,400		11,845

Non-interest income:
Fees and charges	851		1,121
Gains on sales of securities, net	594		581
Other income	174		179
Total non-interest income	1,619		1,881

Non-interest expense:
Compensation and employee benefits	3,950		3,262
Occupancy	704		417
Equipment and data processing	1,591		993
Advertising and marketing	204		187
Professional services	349		153
Dividend equivalent rights	363		375
Merger/conversion	382		—
Amortization of core deposit intangible	593		—
Other	590		454
Total non-interest expense	8,726		5,841

Income before income taxes	9,293		7,885
Provision for income taxes	3,761		3,233
Net income	$	5,532	$	4,652

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

Weighted average common shares outstanding during the period:
Basic	59,944,866		57,076,261
Diluted	60,737,986		58,055,753

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

	Three months ended March 31,
	2005			2004
	(unaudited)

Net income	$	5,532		$	4,652

Other comprehensive income, net of taxes:
Unrealized holding gain (loss)	(1,913		)	399
Income tax expense (benefit)	(706		)	144
Net unrealized holding gain (loss)	(1,207		)	255

Less reclassification adjustment for gains included in net income:
Realized gains	594			581
Income tax expense	213			208
Net reclassification adjustment	381			373

Net other comprehensive loss	(1,588		)	(118		)

Comprehensive income	$	3,944		$	4,534

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended March 31, 2005 and 2004 (Unaudited)

(Dollars in thousands)

	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	—		—		4,652			—			—			—			—			4,652

Unrealized loss on securities available for sale, net of reclassification adjustment	—		—		—			(118		)	—			—			—			(118		)

Common stock dividends of $0.285 per share	—		—		(16,630		)	—			—			—			—			(16,630		)

Exercise of stock options (107,253 shares)	1		529		—			—			—			—			—			530

Income tax benefit from exercise of non-incentive stock options	—		15		—			—			—			—			—			15

Income tax benefit related to recognition and retention shares	—		59		—			—			—			—			—			59

Compensation under recognition and retention plans	—		—		—			—			—			727			—			727

Common stock held by ESOP committed to be released (15,033 shares)	—		152		—			—			—			—			82			234

Balance at March 31, 2004	$	603	$	470,248	$	157,439		$	2,411		$	(17,017	)	$	(13,233	)	$	(4,298	)	$	596,153

	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	—		—		5,532			—			—			—			—			5,532

Unrealized loss on securities available for sale, net of reclassification adjustment	—		—		—			(1,588		)	—			—			—			(1,588		)

Common stock dividends of $0.285 per share	—		—		(17,417		)	—			—			—			—			(17,417		)

Exercise of stock options (1,771 shares)	—		9		—			—			—			—			—			9

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

1,500 shares obtained through the acquisition of Mystic Financial, Inc.	—		—		—			—			(23		)	—			—			(23		)

Income tax benefit from dividends paid to ESOP participants	—		170		—			—			—			—			—			170

Income tax benefit related to recognition and retention plan shares	—		495		—			—			—			—			—			495

Compensation under recognition and retention plans	—		—		—			—			—			722			—			722

Common stock held by ESOP committed to be released (13,866 shares)	—		138		—			—			—			—			75			213

Balance at March 31, 2005	$	630	$	511,768	$	132,196		$	(1,028	)	$	(17,040	)	$	(10,241	)	$	(3,977	)	$	612,308

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

	Three months ended March 31,
	2005			2004
	(unaudited)
Cash flows from operating activities:
Net income	$	5,532		$	4,652
Adjustments to reconcile net income to net cash provided from operating activities:
Provision for loan losses	654			330
Depreciation and amortization	387			177
Amortization, net of accretion, of securities premiums and discounts	690			1,282
Amortization of deferred loan origination costs	1,311			1,047
Amortization of core deposit intangible	593			—
Accretion of acquisition fair value adjustments	(481		)	—
Amortization of mortgage servicing rights	15			—
Net gains from sales of securities	(594		)	(581		)
Equity interest in earnings of other investment	(129		)	(133		)
Swap agreement market valuation credit	(42		)	(39		)
Compensation under recognition and retention plans	722			727
Release of ESOP shares	213			234
Deferred income taxes	144			798
(Increase) decrease in:
Accrued interest receivable	(993		)	(58		)
Prepaid income taxes	1,852			—
Other assets	3,196			(124		)
Increase in:
Income taxes payable	—			245
Accrued expenses and other liabilities	1,796			329
Net cash provided from operating activities	14,866			8,886

Cash flows from investing activities:
Proceeds from sales of securities available for sale	9,478			627
Proceeds from redemptions and maturities of securities available for sale	39,594			16,055
Proceeds from redemptions and maturities of securities held to maturity	13			70
Purchase of securities available for sale	(91,960		)	(15,380		)
Purchase of Federal Home Loan Bank of Boston stock	(891		)	(2,838		)
Net increase in loans	(4,465		)	(57,984		)
Proceeds from sales of participations in loans	29,185			—
Purchase of bank premises and equipment	(538		)	(123		)
Acquisition, net of cash and cash equivalents acquired	(12,892		)	—
Distribution from other investment	147			128
Net cash used for investing activities	(32,329		)	(59,445		)

(Continued)

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

	Three months ended March 31,
	2005			2004
	(unaudited)
Cash flows from financing activities:
Increase (decrease) in demand deposits and NOW, savings and money market savings accounts	(16,970		)	24,206
Increase in certificates of deposit	54,382			5,514
Proceeds from Federal Home Loan Bank of Boston advances	245,400			246,000
Repayment of Federal Home Loan Bank of Boston advances	(241,746		)	(199,238		)
Increase in mortgagors’ escrow accounts	315			688
Income tax benefit from exercise of non-incentive stock options, recognition and retention plan shares and dividends paid to ESOP participants	665			74
Exercise of stock options	9			530
Payment of dividends on common stock	(17,417		)	(16,630		)
Net cash provided from financing activities	24,638			61,144

Net increase in cash and cash equivalents	7,175			10,585
Cash and cash equivalents at beginning of period	136,865			144,703
Cash and cash equivalents at end of period	$	144,040		$	155,288

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds	$	7,713		$	4,750
Income taxes	938			2,115

Acquisition of Mystic Financial, Inc.:
Assets acquired (excluding cash and cash equivalents)	$	472,402		$	—
Liabilities assumed	420,351			—

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2005 and 2004

(Unaudited)

(1) Basis of Presentation (Dollars in thousands)

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.

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

Critical Accounting Policies

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 (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.

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 based upon the Company’s estimate of the number of shares expected to be allocated by the ESOP. 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, if any, of the fair market value of the Company’s stock at the grant date above the exercise price of options granted. 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 March 31,
	2005						2004
	Basic			Diluted			Basic			Diluted

Net income as reported	$	5,532		$	5,532		$	4,652		$	4,652
Total stock-based compensation expense determined using fair value accounting for stock option awards, net of taxes	(65		)	(65		)	(343		)	(343		)
Dividends on unvested restricted stock awards, net of taxes	(236		)	(226		)	(293		)	(277		)
Pro forma net income	$	5,231		$	5,241		$	4,016		$	4,032

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

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 March 31, 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, short-term investments and money market loan participations.

(2) Acquisition (Dollars in thousands)

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.

The total purchase price of the acquisition of $66,366 included the issuance of 2,516,525 shares of the Company’s common stock, payment of $25,335 in cash (including the value of options, net of related income tax benefits) and capitalized costs related to the acquisition of $849 (primarily investment banking and professional fees, net of related income tax benefits). The value assigned to the shares issued was $15.57 per share, the closing market price of the Company’s shares on January 7, 2005, which approximated the average market price of the Company’s stock over the two day period before and the two day period after that date. The acquisition was accounted for under the purchase method of accounting. Accordingly, the results of operations of Mystic were included in the 2005 consolidated statement of income from the date of acquisition.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

Assets
Cash and cash equivalents	$	11,710
Securities available for sale	65,172
Restricted equity securities	4,222
Loans, net	339,959
Premises and equipment	7,596
Other real estate owned	1,400
Goodwill	36,605
Core deposit intangible	11,841
Other assets	8,212
Total assets acquired	486,717

Liabilities
Deposits	332,316
Borrowed funds	73,761
Subordinated debt	12,337
Other liabilities	1,937
Total liabilities assumed	420,351

Net assets acquired	$	66,366

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 $382 ($222 after-tax) have been excluded from the pro forma results for the three months ended March 31, 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 ended March 31, 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 March 31,
	2005			2004

Net interest income	$	17,307		$	15,896
Provision for loan losses	1,154			607
Net interest income after provision for loan losses	16,153			15,289
Non-interest income	1,942			2,289
Non-interest expense	(8,795		)	(9,310		)
Income before income taxes	9,300			8,268
Provision for income taxes	3,975			3,343
Net income	$	5,325		$	4,925

Earning per share:
Basic	$	0.09		$	0.08
Diluted	0.09			0.08

Weighted average shares outstanding:
Basic	60,112,534			59,592,786
Diluted	60,905,654			60,572,278

(3) 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 ended March 31, 2005 and 2004:

	2005				2004
	Basic		Diluted		Basic		Diluted

Net income	$	5,532	$	5,532	$	4,652	$	4,652

Weighted average shares outstanding	59,944,866		59,944,866		57,076,261		57,076,261
Effect of dilutive securities	—		793,120		—		979,492
Adjusted weighted average shares outstanding	59,944,866		60,737,986		57,076,261		58,055,753

Earnings per share	$	0.09	$	0.09	$	0.08	$	0.08

(4) Investment Securities (Dollars in thousands)

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

	March 31, 2005
				Gross		Gross
	Amortized			unrealized		unrealized		Estimated
	cost			gains		losses		fair value
Securities available for sale:
Debt securities:
U.S. Government-sponsored enterprises	$		250,761	$	12	$	1,289	$	249,484
Municipal obligations	11,377			—		128		11,249
Corporate obligations	11,025			87		19		11,093
Other obligations	500			—		—		500
Collateralized mortgage obligations issued by U.S. Government-sponsored enterprises	26,294			2		62		26,234
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	60,050			7		1,130		58,927
Total debt securities	360,007			108		2,628		357,487
Auction rate preferred stock	5,000			—		—		5,000
Other marketable equity securities	3,002			908		23		3,887
Total securities available for sale	$		368,009	$	1,016	$	2,651	$	366,374

Securities held to maturity:
Other obligations	$	500		$	—	$	—	$	500
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	375			20		—		395
Total securities held to maturity	$	875		$	20	$	—	$	895

	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

Debt securities of U.S. Government-sponsored enterprises include obligations issued by Fannie Mae, Freddie Mac, Federal Home Loan Banks and the Federal Farm Credit Bank. None of those obligations is backed by the full faith and credit of the U.S. Government.

(5) Loans (Dollars in thousands)

A summary of loans follows:

	March 31,			December 31,
	2005			2004
Mortgage loans:
One-to-four family	$	284,116		$	135,995
Multi-family	355,766			334,884
Commercial real estate	379,266			297,014
Construction and development	68,885			35,237
Home equity	43,992			14,066
Second	16,065			53,499
Total mortgage loans	1,148,090			870,695
Commercial loans	114,940			75,349
Indirect automobile loans	391,760			368,962
Other consumer loans	2,911			2,406
Total gross loans	1,657,701			1,317,412
Unadvanced funds on loans	(80,724		)	(57,205		)
Deferred loan origination costs (fees):
Indirect automobile loans	10,073			9,732
Other	(166		)	(302		)
Total loans	$	1,586,884		$	1,269,637

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

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

	Three month ended March 31,
	2005			2004

Balance at beginning of period	$	17,540		$	16,195
Allowance obtained through acquisition	3,501			—
Provision for loan losses	654			330
Charge-offs	(455		)	(148		)
Recoveries	143			11
Balance at end of period	$	21,383		$	16,388

(7) Deposits (Dollars in thousands)

A summary of deposits follows:

	March 31,		December 31,
	2005		2004

Demand checking accounts	$	69,637	$	38,588
NOW accounts	108,116		67,217
Savings accounts	127,490		30,634
Guaranteed savings accounts	40,949		49,844
Money market savings accounts	285,589		270,425
Certificate of deposit accounts	511,680		317,250
Total deposits	$	1,143,461	$	773,958

(8) 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 March 31, 2005 and December 31, 2004, such taxes amounted to ($607) and $312, respectively.

(9) Commitments (Dollars in thousands)

At March 31, 2005, the Company had outstanding commitments to originate loans of $52,500, $21,340 of which were commercial real estate and multi-family mortgage loans. Unused lines of credit available to customers were $25,804, of which $21,838 were equity lines of credit.

(10) Dividend Declaration

On April 21, 2005, the Board of Directors of the Company approved and declared a regular quarterly cash dividend of $0.085 per share of common stock to shareholders of record as of April 29, 2005 and payable on May 13, 2005.

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

Activity under the Company’s stock option plans for the three months ended March 31, 2005 was as follows:

Options outstanding at January 1, 2005	3,182,508
Options exercised at $4.944 per share	(1,771	)
Options outstanding at March 31, 2005	3,180,737

Exercisable at March 31, 2005 at:
$ 4.944 per share	1,774,317
$ 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
	2,899,137

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 March 31, 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 Option Plan, dividend equivalent rights amounting to $363 and $375 were paid during the three months ended March 31, 2005 and 2004, respectively, to holders of unexercised options as a result of the $0.20 per share extra dividends paid to stockholders in February 2005 and 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 (applicable to the 1999 RRP and in part to the 2003 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 March 31, 2005, the number of shares available for award under the 1999 RRP and the 2003 RRP were 29,774 shares and 92,000 shares, respectively.

Total expense for the RRP plans amounted to $722 and $727 for the three months ended March 31, 2005 and 2004, respectively.

(12) 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 components of net periodic postretirement benefit costs for the three months ended March 31, 2005 and 2004:

	2005			2004

Service cost	$	39		$	28
Interest cost	19			16
Transition obligation	—			4
Prior service cost	(5		)	—
Actuarial loss	6			1
Net periodic benefit costs	$	59		$	49

Benefits paid amounted to $4 and $6 for the three months ended March 31, 2005 and 2004, respectively.

(13) 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 March 31, 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.

Executive Summary

Operating Highlights

	Three months ended March 31,
	2005			2004
	(In thousands except per share amounts)

Net interest income	$	17,054		$	12,175
Provision for loan losses	654			330
Non-interest income	1,619			1,881
Merger/conversion expenses	382			—
Amortization of core deposit intangible	593			—
Other non-interest expenses	7,751			5,841
Income before income taxes	9,293			7,885
Provision for income taxes	3,761			3,233
Net income	5,532			4,652

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

Interest rate spread	2.59		%	2.29		%
Net interest margin	3.31		%	3.19		%

Financial Condition Highlights

	At			At			At
	March 31,			December 31,			March 31,
	2005			2004			2004
	(In thousands)

Total assets	$	2,184,994		$	1,694,499		$	1,591,208
Net loans	1,565,501			1,252,097			1,113,152
Deposits	1,143,461			773,958			709,641
Borrowed funds	397,552			320,171			267,281
Stockholders’ equity	612,308			585,013			596,153

Allowance for loan losses	$	21,383		$	17,540		$	16,388
Non-performing assets	2,232			439			84

Stockholders’ equity to total assets	28.02		%	34.52		%	37.47		%

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

• Improvement in interest rate spread and net interest margin

• Continued growth of the indirect automobile loan portfolio

• A reduction in accelerated amortization of investment premiums

• A reduction in non-interest income from mortgage loan prepayment fees

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 ended March 31, 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 March 31,
	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	$	139,702		$	846	2.46	%	$	121,359		$	298	0.98	%
Debt securities (2)	317,408			2,295		2.89		276,666			1,515		2.19
Equity securities (2)	31,740			320		4.08		24,111			177		2.94
Mortgage loans (3)	1,109,888			16,670		6.01		830,366			12,251		5.90
Money market loan participations	172			1		2.44		1,726			5		1.16
Other commercial loans (3)	77,580			1,106		5.70		30,441			426		5.60
Indirect automobile loans (3)	389,468			3,897		4.06		246,542			2,335		3.80
Other consumer loans (3)	2,959			50		6.76		2,240			42		7.50
Total interest-earning assets	2,068,917			25,185		4.87	%	1,533,451			17,049		4.44	%
Allowance for loan losses	(20,156		)					(16,347		)
Non-interest earning assets	90,180							34,389
Total assets	$	2,138,941						$	1,551,493

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
NOW accounts	$	96,909		35		0.15	%	$	61,245		20		0.13	%
Savings accounts	159,470			548		1.39		38,330			94		0.98
Money market savings accounts	294,652			947		1.30		293,923			938		1.28
Certificate of deposit accounts	472,052			3,029		2.60		255,015			1,645		2.59
Total deposits	1,023,083			4,559		1.81		648,513			2,697		1.67
Borrowed funds	403,962			3,382		3.35		253,160			2,139		3.34
Subordinated debt	11,032			135		4.93		—			—		—
Total interest bearing liabilities	1,438,077			8,076		2.28	%	901,673			4,836		2.15	%
Non-interest-bearing demand checking accounts	66,140							32,833
Other liabilities	17,058							15,747
Total liabilities	1,521,275							950,253
Stockholders’ equity	617,666							601,240
Total liabilities and stockholders’ equity	$	2,138,941						$	1,551,493
Net interest income (tax equivalent basis)/interest rate spread (4)				17,109		2.59	%				12,213		2.29	%
Less adjustment of tax exempt income				55							38
Net interest income				$	17,054						$	12,175
Net interest margin (5)						3.31	%						3.19	%

(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) Net interest 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.

Highlights from the table on the preceding page follow.

• Average interest-earning assets in the 2005 quarter were $535.5 million, or 34.9%, higher than in the 2004 quarter due to inclusion of the assets resulting from the Mystic acquisition and $142.9 million (58.0%) of growth in the indirect automobile loan portfolio.

• After completion of the acquisition, the Company sold $29.9 million of fixed rate residential mortgage loans with 15 to 30 year maturities originated by Mystic 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.

• Average interest-bearing liabilities in the 2005 quarter were $536.4 million, or 59.5%, higher than in the 2004 quarter due to inclusion of the liabilities resulting from the Mystic acquisition, an increase in borrowings from the Federal Home Loan Bank by Brookline to fund part of the growth of the indirect automobile loan portfolio and an increase in deposits.

• Of the $374.6 million increase in average deposits outstanding, $332.3 million was attributable to the acquisition. Deposits at the Medford banking offices increased by approximately $22.6 million between the acquisition date and March 31, 2005. Brookline’s deposits also increased due to the addition of a new office in the fourth quarter of 2004 and marketing promotions.

• Interest rate spread improved from 2.29% in the 2004 quarter to 2.59% in the 2005 quarter and net interest margin improved from 3.19% in the 2004 quarter to 3.31% in the 2005 quarter. These increases resulted from a higher interest rate environment.

As we have mentioned several times in prior reports, interest rate spread and net interest margin are greatly influenced by interest rates established by the Federal Reserve for overnight borrowings between banks. Since a high percent of the Company’s assets (28.9% in the 2005 quarter and 38.8% in the 2004 quarter) are funded by stockholders’ equity for which there is no charge for interest expense, declining rates cause a greater reduction in interest income from lower yields earned on assets than the reduction in interest expense from lower rates paid on deposits and borrowed funds. Rising interest rates cause the opposite effect. The reduction in assets funded by stockholders’ equity resulted from the Mystic acquisition.

In the second half of 2004, the Federal Reserve increased the overnight borrowing rate from 1.00% to 2.25% and, in the 2005 first quarter, to 2.75%. These rate increases had a positive impact on the Company’s net interest income in the 2005 first quarter. In anticipation of a rising interest rate environment, the Company has restricted most of its purchase of investments over the past year to securities with maturities of two years or less. Trends in interest rates depend on many factors and, accordingly, actual rates in the future could vary significantly with the Company’s rate predictions.

Indirect Automobile Lending

The indirect automobile loan portfolio grew from $211.2 million at the end of 2003 to $369.0 million at the end of 2004 and to $391.8 million at March 31, 2005. The Company continues to focus on originating loans to customers with good credit histories. At March 31, 2005, indirect automobile loans delinquent more than 30 days were $3.1 million, or 0.80% of the portfolio, compared to $3.2 million, or 0.87% of the portfolio, at December 31, 2004. Net charge-offs in the 2005 quarter were $319,000, resulting in an annualized net charge-off rate of 0.33%. The rate of net charge-offs in the year 2004 was 0.40% of average loans outstanding.

The rate of growth of the portfolio is expected to slow down because of the increased cash flow resulting from normal scheduled loan payments and declining automobile sales caused in part by the effect of a higher interest rate environment on the borrowing capacity of consumers.

Accelerated Amortization of Investment Premiums

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

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:

	March 31, 2005			December 31, 2004
	(Dollars in thousands)
Non-accrual loans:
Indirect automobile loans	$	118		$	111
One-to-four family mortgage loans	293			—
Commercial loans	78			—
Total non-accrual loans	489			111
Other real estate owned	1,400			—
Repossessed vehicles	343			328
Total non-performing assets	$	2,232		$	439

Restructured loans	—			—

Allowance for loan losses	$	21,383		$	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	0.03		%	0.01		%
Non- performing assets as a percent of total assets	0.10		%	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. There were no impaired loans (excluding non-accrual loans) at March 31, 2005 and December 31, 2004.

Other real estate owned at March 31, 2005 was comprised of a residential property resulting from a foreclosure initiated by Mystic prior to the acquisition date. Net proceeds from the sale of the property, which is scheduled to take place in the second quarter of 2005, are expected to be approximately equal to the carrying value at March 31, 2005.

The increase in the allowance for loan losses from $17.5 million at December 31, 2004 to $21.4 million at March 31, 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 three months ended March 31, 2005 presented in note 2 to the unaudited consolidated financial statements appearing on pages 10 and 11 herein.

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 become 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 March 31, 2005 was $4.0 million, or 18.6% 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. Also taken into consideration are interest rate swap agreements entered into by the Company.

At March 31, 2005, interest-earning assets maturing or repricing within one year amounted to $914.6 million and interest-bearing liabilities maturing or repricing within one year amounted to $903.6 million, resulting in a cumulative one year positive gap position of $11.0 million, or 0.5% of total assets. At December 31, 2004, the Company had a positive one year cumulative gap position of $146.0 million, or 8.6% of total assets. The reduction in the cumulative one year positive gap position is due primarily to inclusion of the assets acquired and liabilities assumed in the Mystic acquisition and the resulting reduction in total interest-earning assets funded by stockholders’ equity for which there is no charge for interest expense from 36.1% at December 31, 2004 to 28.9% at March 31, 2005.

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 little growth or a net decline in deposits in certain periods. Based on a rising interest rate environment since the second half of 2004, recent deposit trends and current pricing strategies for deposits, management believes the Company will retain at least 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 March 31, 2005 amounted to $397.6 million and the Company had the capacity to increase that amount to $629.2 million.

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 March 31, 2005, such assets amounted to $190.1 million, or 8.7% of total assets.

At March 31, 2005, Brookline Bank exceeded all regulatory capital requirements. The Bank’s Tier I capital was $401.8 million, or 20.1% 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 (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 15d-15(e) under the Exchange Act) as of 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 end 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.

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)

Part I		Financial Information

Item 1.		Financial Statements

		Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004

		Consolidated Statements of Income for the three months ended March 31, 2005 and 2004

		Consolidated Statements of Comprehensive Income for the three months ended March 31, 2005 and 2004

		Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2005 and 2004

		Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004

		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.		Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.		Defaults Upon Senior Securities

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

Item 5.		Other Information

Item 6.		Exhibits

		Signatures

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

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 3, on page 11 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

BROOKLINE BANCORP, INC.

Date: May 5, 2005	By:	/s/ Richard P. Chapman, Jr.
		Richard P. Chapman, Jr.
		President and Chief Executive Officer


Date: May 5, 2005	By:	/s/ Paul R. Bechet
		Paul R. Bechet
		Senior Vice President, Treasurer and Chief Financial Officer

Exhibits