BROOKLINE BANCORP, INC. AND SUBSIDIARIES

(In thousands except share data)

	September 30, 2004			December 31, 2003
	(unaudited)
ASSETS
Cash and due from banks	$	8,262		$	15,131
Short-term investments	99,556			127,572
Securities available for sale	270,432			287,952
Securities held to maturity (market value of $1,228 and $1,381, respectively)	1,198			1,343
Restricted equity securities	16,554			11,401
Loans, excluding money market loan participations	1,233,926			1,072,740
Money market loan participations	6,000			2,000
Allowance for loan losses	(17,161		)	(16,195		)
Net loans	1,222,765			1,058,545
Other investment	4,453			4,251
Accrued interest receivable	5,588			5,248
Bank premises and equipment, net	3,110			2,737
Deferred tax asset	9,725			8,843
Prepaid income taxes	59			—
Other assets	1,572			1,011
Total assets	$	1,643,274		$	1,524,034

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	735,306		$	679,921
Borrowed funds	305,490			220,519
Mortgagors’ escrow accounts	4,978			4,565
Income taxes payable	—			1,489
Accrued expenses and other liabilities	12,457			10,856
Total liabilities	1,058,231			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; 60,477,939 shares and 60,160,530 shares issued, respectively	605			602
Additional paid-in capital	471,580			469,493
Retained earnings, partially restricted	144,977			169,417
Accumulated other comprehensive income	717			2,529
Treasury stock, at cost – 1,335,299 shares	(17,017		)	(17,017		)
Unearned compensation - recognition and retention plans	(11,685		)	(13,960		)
Unallocated common stock held by ESOP – 758,257 shares and 803,356 shares, respectively	(4,134		)	(4,380		)
Total stockholders’ equity	585,043			606,684
Total liabilities and stockholders’ equity	$	1,643,274		$	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 September 30,				Nine months ended September 30,
	2004		2003		2004		2003
	(unaudited)
Interest income:
Loans	$	16,081	$	14,410	$	46,646	$	41,597
Debt securities	1,427		1,750		4,874		5,912
Marketable equity securities	65		90		213		298
Restricted equity securities	139		71		280		219
Short-term investments	401		288		1,004		1,215
Total interest income	18,113		16,609		53,017		49,241

Interest expense:
Deposits	2,975		2,860		8,504		9,525
Borrowed funds	2,477		1,608		6,790		4,439
Total interest expense	5,452		4,468		15,294		13,964
Net interest income	12,661		12,141		37,723		35,277
Provision for loan losses	635		240		1,676		975
Net interest income after provision for loan losses	12,026		11,901		36,047		34,302

Non-interest income:
Fees and charges	496		572		2,166		1,832
Gains on securities, net	806		—		1,767		508
Swap agreement market valuation credit	50		60		178		97
Other income	142		173		493		421
Total non-interest income	1,494		805		4,604		2,858

Non-interest expense:
Compensation and employee benefits	2,477		2,399		7,549		7,148
Recognition and retention plans	722		40		2,168		106
Occupancy	399		360		1,189		1,141
Equipment and data processing	1,164		879		3,249		2,282
Advertising and marketing	113		188		490		563
Dividend equivalent rights	359		361		734		361
Other	625		701		1,866		2,040
Total non-interest expense	5,859		4,928		17,245		13,641

Income before income taxes	7,661		7,778		23,406		23,519

Income tax expense:
Provision for income taxes	3,164		3,276		9,635		9,690
Retroactive assessment related to REIT	—		—		—		2,788
Total income tax expense	3,164		3,276		9,635		12,478

Net income	$	4,497	$	4,502	$	13,771	$	11,041

Earnings per common share:
Basic	$	0.08	$	0.08	$	0.24	$	0.19
Diluted	0.08		0.08		0.24		0.19

Weighted average common shares outstanding during the period:
Basic	57,373,970		56,644,208		57,229,259		56,901,014
Diluted	58,144,811		57,658,817		58,082,856		57,881,992

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

	Three months ended September 30,						Nine months ended September 30,
	2004			2003			2004			2003
	(unaudited)

Net income	$	4,497		$	4,502		$	13,771		$	11,041

Other comprehensive income, net of taxes:
Unrealized holding gains (losses)	362			1,164			(1,059		)	(755		)
Income tax (expense) benefit	(130		)	(413		)	380			350
Net unrealized holding gains (losses)	232			751			(679		)	(405		)

Less reclassification adjustment for gains included in net income:
Realized gains	806			—			1,767			508
Income tax expense	(289		)	—			(634		)	(182		)
Net reclassification adjustment	517			—			1,133			326

Net other comprehensive gains (losses)	(285		)	751			(1,812		)	(731		)

Comprehensive income	$	4,212		$	5,253		$	11,959		$	10,310

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

Nine months ended September 30, 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	—		—				11,041				—				—			—			—			11,041

Unrealized loss on securities available for sale, net of reclassification adjustment	—		—				—				(731			)	—			—			—			(731		)

Common stock dividends of $0.455 per share	—		—				(26,005			)	—				—			—			—			(26,005		)

Proceeds from exercise of stock options (281,462 shares)	3		1,487				—				—				—			—			—			1,490

Income tax benefit from exercise of non-incentive stock options	—		465				—				—				—			—			—			465

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	—		—				—				—				—			106			—			106

Common stock held by ESOP committed to be released (46,503 shares)	—		390				—				—				—			—			253			643

Balance at September 30, 2003	$	590	$		451,512		$		170,824		$		3,424		$	(17,017	)	$	(548	)	$	(4,465	)	$	604,320

	Common stock			Additional paid-in capital			Retained earnings			Accumulated other comprehensive income			Treasury stock			Unearned compensation- recognition and retention plans			Unallocated common stock held by ESOP			Total stockholders’ equity

Balance at December 31, 2003	$	602		$	469,493		$	169,417		$	2,529		$	(17,017	)	$	(13,960	)	$	(4,380	)	$	606,684

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

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

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

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

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

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

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

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

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

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

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

	Nine months ended September 30,
	2004			2003
	(unaudited)

Cash flows from operating activities:
Net income	$	13,771		$	11,041
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,676			975
Compensation under recognition and retention plans	2,168			106
Release of ESOP shares	676			643
Depreciation and amortization	522			475
Amortization, net of accretion, of securities premiums and discounts	2,989			5,870
Amortization of deferred loan origination costs	3,514			548
Net gains from sales of securities	(1,767		)	(508		)
Equity interest in earnings of other investment	(473		)	(431		)
Swap agreement market valuation credit	(178		)	(97		)
Deferred income taxes	133			(557		)
(Increase) decrease in:
Accrued interest receivable	(340		)	178
Prepaid income taxes	(59		)	—
Other assets	(561		)	(205		)
Increase (decrease) in:
Income taxes payable	(1,489		)	(4,075		)
Accrued expenses and other liabilities	1,779			2,579
Net cash provided from operating activities	22,361			16,542

Cash flows from investing activities:
Proceeds from sales of securities available for sale	2,132			2,081
Proceeds from redemptions and maturities of securities available for sale	96,674			197,430
Proceeds from redemptions and maturities of securities held to maturity	144			3,448
Purchase of securities available for sale	(85,334		)	(138,307		)
Purchase of Federal Home Loan Bank of Boston stock	(5,153		)	—
Net increase in loans	(165,410		)	(216,337		)
Proceeds from sales of participations in loans	—			5,377
Purchase of bank premises and equipment	(895		)	(1,425		)
Distribution from other investment	271			244
Net cash used for investing activities	(157,571		)	(147,489		)

	Nine months ended September 30,
	2004				2003
	(unaudited)

Cash flows from financing activities:
Increase in demand deposits and NOW, savings and money market savings accounts	$		29,083		$	43,038
Increase (decrease) in certificates of deposit	26,302				(24,592			)
Proceeds from Federal Home Loan Bank of Boston advances	489,700				52,000
Repayment of Federal Home Loan Bank of Boston advances	(404,729			)	(6,369			)
Increase in mortgagors’ escrow accounts	413				679
Proceeds from exercise of stock options	1,580				1,490
Income tax benefit from exercise of non-incentive stock options, dividend paid to ESOP participants and recognition and retention plan shares	187				468
Purchase of treasury stock	—				(15,073			)
Payment of dividends on common stock	(38,211			)	(26,005			)
Net cash provided from financing activities	104,325				25,636

Net decrease in cash and cash equivalents	(30,885			)	(105,311			)
Cash and cash equivalents at beginning of period	144,703				242,468
Cash and cash equivalents at end of period	$	113,818			$		137,157

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds	$	15,130			$		13,870
Income taxes	10,862				16,546

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Nine months ended September 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 nine months ended September 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 September 30,
	2004								2003
	Basic					Diluted			Basic			Diluted

Net income as reported	$			4,497		$	4,497		$	4,502		$	4,502
Total stock-based compensation expense determined using fair value accounting for stock option awards, net of taxes	(294				)	(294		)	(62		)	(62		)
Dividends on unvested restricted stock awards	(280				)	(272		)	(39		)	(26		)
Pro forma net income	$		3,923			$	3,931		$	4,401		$	4,414

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

	Nine months ended September 30,
	2004						2003
	Basic			Diluted			Basic			Diluted

Net income as reported	$	13,771		$	13,771		$	11,041		$	11,041
Total stock-based compensation expense determined using fair value accounting for stock option awards, net of taxes	(941		)	(941		)	(264		)	(264		)
Dividends on unvested restricted stock awards	(656		)	(634		)	(65		)	(44		)
Pro forma net income	$	12,174		$	12,196		$	10,712		$	10,733

Earnings per share:
As reported	$	0.24		$	0.24		$	0.19		$	0.19
Pro forma	0.21			0.21			0.18			0.19

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 nine months ended September 30, 2004 and 2003:

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

Net income	$		4,497	$	4,497	$	4,502	$	4,502

Weighted average shares outstanding	57,373,970			57,373,970		56,644,208		56,644,208
Effect of dilutive securities	—			770,841		—		1,014,609
Adjusted weighted average shares outstanding	57,373,970			58,144,811		56,644,208		57,658,817

Earnings per share	$	0.08		$	0.08	$	0.08	$	0.08

	Nine months ended September 30,
	2004				2003
	Basic		Diluted		Basic		Diluted

Net income	$	13,771	$	13,771	$	11,041	$	11,041

Weighted average shares outstanding	57,229,259		57,229,259		56,901,014		56,901,014
Effect of dilutive securities	—		853,597		—		980,978
Adjusted weighted average shares outstanding	57,229,259		58,082,856		56,901,014		57,881,992

Earnings per share	$	0.24	$	0.24	$	0.19	$	0.19

(3) Investment Securities (Dollars in thousands)

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

	September 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	$		162,578	$	8	$	403	$	162,183
Municipal obligations	5,428			—		11		5,417
Corporate obligations	8,608			201		—		8,809
Other obligations	500			—		—		500
Collateralized mortgage obligations issued by U.S. Government agencies	63,711			48		131		63,628
Mortgage-backed securities issued by U.S. Government agencies	20,550			81		23		20,608
Total debt securities	261,375			338		568		261,145
Auction rate preferred stock	5,000			—		—		5,000
Other marketable equity securities	2,940			1,374		27		4,287
Total securities available for sale	$	269,315		$	1,712	$	595	$	270,432

Securities held to maturity:
Other obligations	$	750		$	—	$	—	$	750
Mortgage-backed securities issued by U.S. Government agencies	448			30		—		478
Total securities held to maturity	$	1,198		$	30	$	—	$	1,228

	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:

	September 30, 2004			December 31, 2003
Mortgage loans:
One-to-four family	$	131,456		$	122,524
Multi-family	333,584			339,998
Commercial real estate	300,696			312,647
Construction and development	26,332			24,813
Home equity	14,534			12,082
Second	52,574			43,650
Total mortgage loans	859,176			855,714
Commercial loans	73,691			44,207
Indirect automobile loans	344,537			211,206
Other consumer loans	2,577			2,401
Total gross loans	1,279,981			1,113,528
Unadvanced funds on loans	(55,039		)	(46,777		)
Deferred loan origination costs (fees):
Indirect automobile loans	9,334			6,254
Other	(350		)	(265		)
Loans, excluding money market loan participations	1,233,926			1,072,740
Money market loan participations	6,000			2,000
	$	1,239,926		$	1,074,740

(5) Deposits (Dollars in thousands)

A summary of deposits follows:

	September 30, 2004		December 31, 2003

Demand checking accounts	$	38,618	$	34,240
NOW accounts	62,765		62,583
Savings accounts	31,039		27,302
Money market savings accounts	271,283		303,046
Guaranteed savings accounts	52,549		—
Certificate of deposit accounts	279,052		252,750
Total deposits	$	735,306	$	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 September 30, 2004 and December 31, 2003, such taxes amounted to $400 and $1,414, respectively.

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

At September 30, 2004, the Company had outstanding commitments to originate loans of $35,135, $14,228 of which were commercial real estate and multi-family mortgage loans. Unused lines of credit available to customers were $26,926, $22,628 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 nine months ended September 30, 2004 and 2003 was $55, $61, $178 and $176, respectively. Changes in the fair value of the outstanding swap agreement are recognized as charges or credits to earnings. For the three months and nine months ended September 30, 2004 and 2003, $50, $60, $178 and $97, respectively, were credited to pre-tax earnings.

(8) Dividend Declaration

On October 21, 2004, the Board of Directors of the Company approved a quarterly dividend of $0.085 per share payable November 15, 2004 to stockholders of record on October 29, 2004.

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

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

Options outstanding at January 1, 2004	3,509,628
Options exercised at $4.944 per share	(319,623	)
Options forfeited at $14.95 per share	(7,500	)
Options outstanding at September 30, 2004	3,182,505

Exercisable at September 30, 2004:
$4.944 per share	1,786,088
$11.00 per share	5,393
$14.95 per share	531,000
$15.42 per share	3,527
	2,326,008

Shares issued upon the exercise of a stock option may be either authorized but unissued shares or reacquired shares held by the Company as treasury shares. Any shares subject to an award which expire or are terminated unexercised will again be available for issuance. Options awarded vest over periods ranging from less than one month through over five years. As of September 30, 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 Stock Option Plan, dividend equivalent rights were paid during the three months ended September 30, 2004 and 2003 amounting to $359 and $361, respectively, and during the nine months ended September 30, 2004 and 2003 amounting to $734 and $361, respectively, to holders of unexercised options as a result of the $0.20 per share extra dividends paid semi-annually to stockholders.

The Company has two recognition and retention plans, the “1999 RRP” and the “2003 RRP”. Under both of the plans, shares of the Company’s common stock were reserved for issuance as restricted stock awards to officers, employees and non-employee directors of the Company. Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company as treasury shares. Any shares not issued because vesting requirements are not met will again be available for issuance under the plans. Shares awarded vest over varying time periods ranging from six months up to eight years for the 1999 RRP and from less than three months to over five years for the 2003 RRP. In the event a recipient ceases to maintain continuous service with the Company by reason of normal retirement, death or disability, or following a change in control, RRP shares still subject to restriction will vest and be free of such restrictions. As of September 30, 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 $722, $40, $2,168 and $106 for the three months and nine months ended September 30, 2004 and 2003, respectively. The total expense of the RRP plans is expected to be $722 for the fourth quarter 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 nine months ended September 30, 2003 and an estimate of the components of net periodic postretirement benefit costs for the three months and nine months ended September 30, 2004:

	Three months ended September 30,				Nine months ended September 30,
	2004		2003		2004		2003

Service cost	$	31	$	25	$	94	$	74
Interest cost	17		16		51		48
Transition obligation	3		4		9		13
Actuarial loss	4		—		11		—
Net periodic benefit costs	$	55	$	45	$	165	$	135

Postretirement benefits costs in the above table for the three months and nine months ended September 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 $165 to expense for the nine months ended September 30, 2004 instead of $251 that otherwise would have been charged to expense if no change in benefits was contemplated.

Benefits paid for the nine months ended September 30, 2004 and 2003 amounted to $18 and $15, 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 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.

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, 23 and 24 herein.

Executive Summary

Operating Highlights

	Three months ended September 30,						Nine months ended September 30,
	2004			2003			2004			2003
	(In thousands except per share amounts)

Net interest income	$	12,661		$	12,141		$	37,723		$	35,277
Provision for loan losses	635			240			1,676			975
Non-interest income	1,494			805			4,604			2,858
Recognition and retention plans	722			40			2,168			106
Dividend equivalent rights expense	359			361			734			361
Other non-interest expenses	4,778			4,527			14,343			13,174
Income before income taxes	7,661			7,778			23,406			23,519
Provision for income taxes	3,164			3,276			9,635			9,690
Retroactive assessment related to REIT	—			—			—			2,788
Net income	4,497			4,502			13,771			11,041

Basic earnings per common share	$	0.08		$	0.08		$	0.24		$	0.19
Diluted earnings per common share	0.08			0.08			0.24			0.19

Interest rate spread	2.28		%	2.41		%	2.33		%	2.21		%
Net interest margin	3.14		%	3.42		%	3.20		%	3.34		%

Financial Condition Highlights

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

Total assets	$		1,643,274		$	1,524,034		$	1,458,459
Net loans	1,222,765				1,058,545			1,000,810
Deposits	735,306				679,921			667,771
Borrowed funds	305,490				220,519			170,531
Stockholders’ equity	585,043				606,684			604,320

Non-performing assets	$	336			$	133		$	111

Stockholders’ equity to total assets	35.60			%	39.81		%	41.44		%

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

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

• Growth of the indirect automobile lending business (loans outstanding - $345 million at September 30, 2004 compared to $313 million at June 30, 2004, $211 million at December 31, 2003 and $155 million at September 30, 2003)

• Accelerated amortization of deferred loan origination costs as a result of loan prepayments - $356,000 in the 2004 quarterly period and $1,018,000 in the 2004 nine month period; none in the 2003 periods

• Reduction in accelerated amortization of premiums paid to purchase mortgage securities - $124,000 in the 2004 quarterly period compared to $126,000 in the 2003 quarterly period; $250,000 versus $1,806,000, respectively, in the nine month periods ended September 30, 2004 and 2003

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 nine months ended September 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 September 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	$	114,288		$	401	1.39	%	$	115,109		$	288	0.99	%
Debt securities (2) (4)	262,097			1,435		2.19		302,612			1,759		2.33
Equity securities (2)	26,188			228		3.46		21,535			194		3.59
Mortgage loans (3)	819,984			12,066		5.89		828,683			12,564		6.06
Money market loan participations	3,768			14		1.47		2,653			7		1.12
Commercial loans (3)	49,358			563		4.56		26,052			372		5.71
Indirect automobile loans (3)	338,820			3,394		3.97		127,067			1,419		4.43
Other consumer loans (3)	2,471			44		7.12		2,561			48		7.50
Total interest-earning assets	1,616,974			18,145		4.47	%	1,426,272			16,651		4.67	%
Allowance for loan losses	(17,042		)					(15,868		)
Non-interest earning assets	30,503							29,044
Total assets	$	1,630,435						$	1,439,448

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
NOW accounts	$	62,775		21		0.13	%	$	59,804		22		0.15	%
Savings accounts	81,173			374		1.83		23,591			29		0.49
Money market savings accounts	276,164			767		1.10		306,958			1,077		1.39
Certificate of deposit accounts	274,607			1,813		2.62		243,624			1,732		2.82
Total deposits	694,719			2,975		1.70		633,977			2,860		1.79
Borrowed funds	294,749			2,477		3.29		152,000			1,608		4.14
Total interest bearing liabilities	989,468			5,452		2.19	%	785,977			4,468		2.26	%
Non-interest-bearing demand checking accounts	36,563							32,130
Other liabilities	13,925							12,315
Total liabilities	1,039,956							830,422
Stockholders’ equity	590,479							609,026
Total liabilities and stockholders’ equity	$	1,630,435						$	1,439,448
Net interest income (tax equivalent basis)/interest rate spread				12,693		2.28	%				12,183		2.41	%
Less adjustment of tax exempt income				32							42
Net interest income				$	12,661						$	12,141
Net interest margin						3.14	%						3.42	%

(1) Tax exempt income on debt and equity securities 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 $124 of accelerated amortization of premiums on mortgage securities. Excluding this charge, the yield on debt securities in the 2004 period would have been 2.38%. Included in interest income in the 2003 period is $126 of accelerated amortization of premiums on mortgage securities. Excluding this charge, the yield on debt securities in the 2003 period would have been 2.49%. Excluding these adjustments on debt securities, the yield on interest-earning assets for the 2004 and 2003 periods would have been 4.50% and 4.70%, respectively.

	Nine months ended September 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	$	117,998		$	1,004	1.13	%	$	141,963		$	1,215	1.14	%
Debt securities (2) (4)	270,879			4,900		2.41		346,048			5,925		2.28
Equity securities (2)	25,171			571		3.02		21,878			626		3.82
Mortgage loans (3)	822,673			36,349		5.89		812,592			38,256		6.28
Money market loan participations	2,051			21		1.37		2,564			25		1.30
Other commercial loans (3)	36,950			1,423		5.13		24,294			1,067		5.86
Indirect automobile loans (3)	296,603			8,722		3.92		62,709			2,080		4.42
Other consumer loans (3)	2,351			131		7.43		2,952			169		7.63
Total interest-earning assets	1,574,676			53,121		4.49	%	1,415,000			49,363		4.65	%
Allowance for loan losses	(16,632		)					(15,552		)
Non-interest earning assets	31,441							28,243
Total assets	$	1,589,485						$	1,427,691

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
NOW accounts	$	62,231		63		0.13	%	$	61,981		83		0.18	%
Savings accounts	64,799			788		1.62		20,477			102		0.66
Money market savings accounts	284,040			2,547		1.20		293,318			3,534		1.61
Certificate of deposit accounts	263,884			5,106		2.58		255,390			5,806		3.03
Total deposits	674,954			8,504		1.68		631,166			9,525		2.01
Borrowed funds	269,172			6,790		3.36		133,400			4,439		4.44
Total interest bearing liabilities	944,126			15,294		2.16	%	764,566			13,964		2.44	%
Non-interest-bearing demand checking accounts	34,900							29,232
Other liabilities	14,470							16,440
Total liabilities	993,496							810,238
Stockholders’ equity	595,989							617,453
Total liabilities and stockholders’ equity	$	1,589,485						$	1,427,691
Net interest income (tax equivalent basis)/interest rate spread				37,827		2.33	%				35,399		2.21	%
Less adjustment of tax exempt income				104							122
Net interest income				$	37,723						$	35,277
Net interest margin						3.20	%						3.34	%

(1) Tax exempt income on debt and equity securities 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 $250 of accelerated amortization of premiums on mortgage securities. Excluding this charge, the yield on debt securities in the 2004 period would have been 2.54%. Included in interest income on debt securities in the 2003 period is approximately $1,806 of accelerated amortization of premiums on mortgage securities. Excluding this charge, the yield on debt securities in the 2003 period would have been 2.98%. Excluding these adjustments on debt securities, the yield on interest-earning assets for the 2004 and 2003 periods would have been 4.51% and 4.82%, respectively.

Highlights from the tables on the two preceding pages follow.

• Net interest income rose $520,000, or 4.3%, in the quarterly periods and $2,446,000, or 6.9%, in the nine month periods due primarily to asset growth. Interest rate spread improved in the 2004 nine month period compared to the 2003 nine month period but declined in the 2004 quarterly period compared to the 2003 quarterly period.

• The average balances of total interest-earning assets increased $190.7 million, or 13.4%, in the quarterly periods and $159.7 million, or 11.3%, in the nine month periods. The increase was attributable to growth of the indirect automobile loan portfolio. Part of the 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 73.7% of average total interest-earning assets in the 2004 nine month period compared to 64.0% in the 2003 nine month period.

• Interest rate spread improved in the nine month period 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. The decline in interest rate spread in the 2004 quarterly period compared to the 2003 quarterly period was attributable primarily to the payment and maturity of higher yielding loans and investments and the replacement of such assets with new loans and investments with lower yields.

• Net interest margin, which is net interest income on a tax equivalent basis divided by interest-earning assets, deteriorated in the quarterly and nine month periods due to a lesser rate of growth in net interest income than the rate of growth of interest-earning assets.

As we have stated in previous reports, asset yields have been shrinking steadily over the past few years due to an interest rate environment that has been the lowest in over forty years. Since a high percent of the Company’s assets (ranging from 36% to 43% in the 2004 and 2003 quarterly and nine 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. From May 2000 through June 2004, the federal funds rate for overnight borrowings declined from 6.50% to 1.00%. From June to September 2004, the Federal Reserve increased the federal funds rate from 1.00% to 1.75%. 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 $345 million at September 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 September 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 September 30, 2004 was $2,898,000, or 0.84% 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 nine month periods ended September 30, 2004, approximately $12.2 million and $33.6 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 $356,000 and $1,018,000, respectively, of accelerated amortization of deferred loan origination costs being charged to interest income in the three month and nine month periods ended September 30, 2004; there were no accelerated amortization charges in 2003.

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 and $84.7 million at September 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 subsided in the latter part of 2003 and the second quarter of 2004, picked up in the first and third quarters of 2004. As a result, accelerated amortization of investment premiums charged to interest income was $124,000 and $126,000, respectively, in the three month periods ended September 30, 2004 and 2003 and $250,000 and $1,806,000, respectively, in the nine month periods ended September 30, 2004 and 2003. 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 September 30, 2004 was $968,000. Of that amount, $298,000 is scheduled to amortize in the fourth quarter 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 September 30, 2004 and 2003 were $635,000 and $240,000, respectively; charges to earnings in the nine month periods ended on those dates were $1,676,000 and $975,000, 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 $711,000 and $73,000, in the nine month periods ended September 30, 2004 and 2003, respectively, 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.

See the sub-section Non-Performing Assets, Restructured Loans and Allowance for Loan Losses on pages 23 and 24 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 $722,000 in the 2004 quarterly period compared to $40,000 in the 2003 quarterly period and $2,168,000 and $106,000, respectively, for the nine month periods ended September 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 were paid to holders of unexercised options awarded under that plan as a result of the semi-annual $0.20 per share extra dividends paid to stockholders of the Company. Such payments amounted to $359,000 and $361,000, respectively, in the three month periods ended September 30, 2004 and 2003 and $734,000 and $361,000, respectively, in the nine month periods ended September 30, 2004 and 2003.

Mortgage Loan Prepayment Fees

Fees credited to income from prepayment of mortgage loans in the three month periods ended September 30, 2004 and 2003 were $223,000 and $245,000, respectively; credits to income in the nine month periods ended September 30, 2004 and 2003 were $1,364,000 and $762,000, respectively. The higher fees in the 2004 nine 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, $2,788,000 (on an after-tax basis) was charged to earnings in the 2003 nine month period 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 for the years 1999 through 2002. The dispute was resolved on June 23, 2003.

Reduction in Stockholders’ Equity

Stockholders’ equity declined $21.6 million from December 31, 2003 to September 30, 2004 due to two payments of extra dividends of $0.20 per share to stockholders in February and August 2004. Such dividend payments exceeded net earnings in the nine month period ended September 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 September 30, 2004 and 2003 were $806,000 and none, respectively; gains in the nine month periods ended September 30, 2004 and 2003 were $1,767,000 and $508,000, respectively.

Non-Interest Expense. Excluding expenses for recognition and retention plans and dividend equivalent rights, other non-interest expenses increased $251,000, or 5.5%, in the 2004 third quarter compared to the 2003 third quarter and $1,169,000, or 8.9%, in the 2004 nine month period ended September 30, 2004, compared to the 2003 nine month period ended September 30, 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 $55.4 million, or 8.1%, in the first nine months 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 $220.5 million at December 31, 2003 to $305.5 million at September 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 the nine month period ended September 30, 2004. 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%. New borrowings in the 2004 third quarter included $15.0 million for two years at 2.99%, $10.0 million for three years at 3.29% and $2.0 million for seven years at 3.94%. An additional $15.0 million was borrowed during the first nine months 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:

	September 30, 2004				December 31, 2003
	(Dollars in thousands)
Non-accrual loans:
Indirect automobile loans	$		91		$	49
Other consumer loans	—				1
Total non-accrual loans	91				50
Repossessed vehicles	245				83
Total non-performing assets	$		336		$	133

Restructured loans	$		—		$	—

Allowance for loan losses	$	17,161			$		16,195

Allowance for loan losses as a percent of total loans	1.38			%	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 September 30, 2004 and December 31, 2003.

The Company increased its allowance for loan losses by charging $1,676,000 to earnings in the nine months ended September 30, 2004 and $975,000 in the nine months ended September 30, 2003. The charges to earnings were attributable primarily to loan growth. Gross loans outstanding increased $165.2 million and $209.3 million during the nine month periods ended September 30, 2004 and 2003, respectively. Of those amounts, $133.3 million and $155.1 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 $575,000 and $205,000 for the three months ended September 30, 2004 and 2003, respectively, and $1,457,000 and $306,000 for the nine months ended September 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 nine months ended September 30, 2004 and 2003, loan charge-offs were $777,000 and $128,000, respectively, and recoveries of loans previously charged off were $66,000 and $55,000, respectively. Of the 2004 charge-offs and recoveries, $764,000 and $59,000, respectively, related to indirect automobile loans. Charge-offs, net of recoveries, for the nine months ended September 30, 2004 equaled 0.24% 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 $2,898,000, or 0.84% of the portfolio, at September 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 September 30, 2004, interest-earning assets maturing or repricing within one year amounted to $719.9 million and interest-bearing liabilities maturing or repricing within one year (net of a $5.0 million interest rate swap agreement) amounted to $518.2 million, resulting in a cumulative one year positive gap position of $201.7 million, or 12.3% 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 $389.9 million, or 23.7%, of total assets at September 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 $55.4 million, or 8.1%, in the nine months ended September 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 September 30, 2004 amounted to $305.5 million and the Company had the capacity to increase that amount to $454.1 million. It is expected that net loan growth over the remainder of 2004 could be in the range of $30 million and that part of the funding will come from advances from the FHLB. It is also expected that approximately an additional $30 million will be borrowed by the end of 2004 in connection with the completion of the acquisition of Mystic Financial, Inc. The amount ultimately borrowed from the FHLB will depend on actual loan growth, actual payments in connection with the acquisition of Mystic Financial, Inc. 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 funding needs were met through deposit growth. 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 September 30, 2004, such assets amounted to $138.9 million, or 8.5% of total assets.

At September 30, 2004, Brookline Bank exceeded all regulatory capital requirements. The Bank’s Tier I capital was $434.7 million, or 29.0% 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 24 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.

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

For the quarterly period ended September 30, 2004

OR

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

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)

Part I	Financial Information

Item 1.	Financial Statements

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

	Consolidated Statements of Income for the three months and nine months ended September 30, 2004 and 2003

	Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2004 and 2003

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

	Consolidated Statements of Cash Flows for the nine months ended September 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

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.

Date: November 8, 2004	By:	/s/ Richard P. Chapman, Jr.
		Richard P. Chapman, Jr.
		President and Chief Executive Officer


Date: November 8, 2004	By:	/s/ Paul R. Bechet
		Paul R. Bechet
		Senior Vice President, Treasurer and Chief Financial Officer

Exhibits

Reports on Form 8-K