Edgar Filing: BROOKLINE BANCORP INC

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

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

For the transition period from to

Commission file number 0-23695

Brookline Bancorp, Inc.
(Exact name of registrant as specified in its charter)

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

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

(617) 730-3500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Smaller Reporting Company |_|

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|

As of October 31, 2008, the number of shares of common stock, par value $0.01
per share outstanding was 58,369,261.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q

Index

Part I Financial Information Page

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007 1

Consolidated Statements of Income for the three months and nine months ended
September 30, 2008 and 2007 2

Consolidated Statements of Comprehensive Income for the three months and nine
months ended September 30, 2008 and 2007 3

Consolidated Statements of Changes in Stockholders' Equity for the nine months
ended September 30, 2008 and 2007 4

Consolidated Statements of Cash Flows for the nine months ended September 30,
2008 and 2007 6

Notes to Unaudited Consolidated Financial Statements 8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 15

Item 3. Quantitative and Qualitative Disclosures about Market Risks 26

Item 4. Controls and Procedures 26

Part II Other Information

Item 1. Legal Proceedings 26

Item 1A.Risk Factors 27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27

Item 3. Defaults Upon Senior Securities 27

Item 4. Submission of Matters to a Vote of Security Holders 27

Item 5. Other Information 27

Item 6. Exhibits 28

Signatures 29

Part I - Financial Information
Item 1. Financial Statements

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share data)

September 30, December 31,
2008 2007
----------------- -----------------
(unaudited)
ASSETS
------
Cash and due from banks........................................................ $ 21,516 $ 17,699
Short-term investments......................................................... 111,528 135,925
Securities available for sale.................................................. 279,865 284,051
Securities held to maturity (market value of $172 and $199, respectively) ..... 164 189
Restricted equity securities................................................... 35,318 28,143
Loans ......................................................................... 2,065,748 1,890,896
Allowance for loan losses...................................................... (27,232) (24,445)
--------------- ---------------
Net loans................................................................. 2,038,516 1,866,451
--------------- ---------------
Accrued interest receivable.................................................... 8,902 9,623
Bank premises and equipment, net............................................... 9,910 9,045
Deferred tax asset............................................................. 13,342 10,849
Prepaid income taxes .......................................................... - 2,105
Goodwill....................................................................... 43,241 42,545
Identified intangible assets, net of accumulated
amortization of $7,931 and $6,618, respectively 5,021 6,334
Other assets................................................................... 5,663 5,551
--------------- ---------------
Total assets.............................................................. $ 2,572,986 $ 2,418,510
=============== ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Retail deposits................................................................ $ 1,300,394 $ 1,250,337
Brokered deposits ............................................................. 27,047 67,904
Borrowed funds................................................................. 727,162 548,015
Subordinated debt.............................................................. - 7,008
Mortgagors' escrow accounts.................................................... 5,802 5,051
Income taxes payable........................................................... 5 -
Accrued expenses and other liabilities......................................... 20,835 20,116
--------------- ---------------
Total liabilities......................................................... 2,081,245 1,898,431
--------------- ---------------

Minority interest in subsidiary................................................ 1,275 1,371
--------------- ---------------

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;
63,742,994 shares and 63,323,703 shares issued, respectively.............. 637 633
Additional paid-in capital.................................................. 517,865 513,949
Retained earnings, partially restricted..................................... 38,356 68,875
Accumulated other comprehensive (loss) income .............................. (1,364) 121
Treasury stock, at cost - 5,373,733 shares and 5,333,633 shares,
respectively.............................................................. (62,107) (61,735)
Unallocated common stock held by ESOP - 535,815 shares and 574,974 shares,
respectively.............................................................. (2,921) (3,135)
--------------- ---------------
Total stockholders' equity............................................. 490,466 518,708
--------------- ---------------

Total liabilities and stockholders' equity............................. $ 2,572,986 $ 2,418,510
=============== ===============

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands except share data)

Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
(unaudited)
Interest income:
Loans...................................................... $ 31,735 $ 31,258 $ 93,541 $ 91,181
Debt securities............................................ 3,381 3,342 10,537 10,682
Marketable equity securities............................... 50 15 173 50
Restricted equity securities............................... 266 469 998 1,353
Short-term investments..................................... 559 1,759 1,971 5,242
------------ ------------ ------------ ------------
Total interest income.................................... 35,991 36,843 107,220 108,508
------------ ------------ ------------ ------------

Interest expense:
Retail deposits............................................ 8,997 11,476 30,673 33,332
Brokered deposits.......................................... 366 1,019 1,846 3,092
Borrowed funds............................................. 7,286 6,211 20,089 17,371
Subordinated debt ......................................... - 140 65 531
------------ ----------- ------------ ------------
Total interest expense................................... 16,649 18,846 52,673 54,326
------------ ----------- ------------ ------------

Net interest income........................................... 19,342 17,997 54,547 54,182
Provision for credit losses................................... 3,162 1,503 7,855 3,860
------------ ----------- ------------ ------------
Net interest income after provision for credit losses.... 16,180 16,494 46,692 50,322
------------ ----------- ------------ ------------

Non-interest (loss) income:
Fees and charges........................................... 935 926 3,021 3,217
Loss on write-downs and sales of securities, net .......... (1,600) - (2,849) -
Other income .............................................. 23 1 54 40
------------ ------------ ------------ ------------
Total non-interest (loss) income......................... (642) 927 226 3,257
------------ ------------ ------------ ------------

Non-interest expense:
Compensation and employee benefits......................... 5,221 5,227 15,779 15,712
Occupancy.................................................. 922 854 2,761 2,545
Equipment and data processing.............................. 1,706 1,700 5,079 4,872
Professional services...................................... 1,021 462 2,027 1,477
Advertising and marketing.................................. 421 406 759 813
Amortization of identified intangibles..................... 438 503 1,313 1,511
Other...................................................... 1,428 1,243 4,177 3,520
------------ ------------ ------------ ------------
Total non-interest expense............................... 11,157 10,395 31,895 30,450
------------ ------------ ------------ ------------

Income before income taxes and minority interest.............. 4,381 7,026 15,023 23,129
Provision for income taxes................................... 2,567 2,711 6,731 8,932
------------ ------------ ------------ ------------
Net income before minority interest ..................... 1,814 4,315 8,292 14,197

Minority interest in earnings of subsidiary................... 63 66 172 154
------------ ------------ ------------ ------------
Net income............................................... $ 1,751 $ 4,249 $ 8,120 $ 14,043
============ ============ ============ ============

Earnings per common share:
Basic.................................................... $ 0.03 $ 0.07 $ 0.14 $ 0.24
Diluted.................................................. 0.03 0.07 0.14 0.23

Weighted average common shares outstanding during the period:
Basic.................................................... 57,672,084 58,541,627 57,577,738 59,597,169
Diluted.................................................. 57,894,141 59,020,681 57,826,811 60,171,865

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)

Net income................................................... $ 1,751 $ 4,249 $ 8,120 $ 14,043
------------ ------------ ------------ ------------

Other comprehensive income, net of taxes:
Unrealized securities holding (losses) gains.............. (2,973) 1,559 (5,121) 1,025
Income tax (expense) benefit ............................. 469 (563) 1,306 (370)
------------ ------------ ------------ ------------
Net unrealized securities holding (losses) gains..... (2,504) 996 (3,815) 655
------------ ------------ ------------ ------------
Adjustment of accumulated obligation
for postretirement benefits.............................. (7) (6) (14) (13)

Income tax benefit ....................................... 3 2 6 5
------------ ------------ ------------ ------------
Net adjustment of accumulated obligation
for postretirement benefits ....................... (4) (4) (8) (8)
------------ ------------ ------------ ------------

Net unrealized holding (losses) gains................ (2,508) 992 (3,823) 647
------------ ------------ ------------ ------------

Less reclassification adjustment for losses included in net income:
Loss on write-downs and sales of securities............. (1,600) - (2,849) -
Income tax benefit...................................... 63 - 511 -
------------ ------------ ------------ ------------
Net reclassification adjustment...................... (1,537) - (2,338) -
------------ ------------ ------------ ------------

Net other comprehensive (losses) income.............. (971) 992 (1,485) 647
------------ ------------ ------------ ------------

Comprehensive income......................................... $ 780 $ 5,241 $ 6,635 $ 14,690
============ ============ ============ ============

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, 2008 and 2007 (Unaudited)
(Dollars in thousands)

Accumulated Unallocated
Additional other common stock Total
Common paid-in Retained comprehensive Treasury held by stockholders'
stock capital earnings income (loss) stock ESOP equity
---------- -------------- ------------- ---------------- ------------ --------------- -------------

Balance at
December 31, 2006 ........... $ 630 $ 508,248 $ 96,229 $ (640) $ (18,144) $ (3,430) $ 582,893

Net income .................. - - 14,043 - - - 14,043

Other comprehensive
income...................... - - - 647 - - 647

Common stock dividends of
$0.655 per share ........... - - (39,181) - - - (39,181)

Payment of dividend
equivalent rights .......... - - (982) - - - (982)

Exercise of stock
options
(299,186 shares)............. 3 774 - - - - 777

Treasury stock
purchases
(2,517,300 shares) ......... - - - - (29,671) - (29,671)

Reload options
granted
(155,663 shares)............ - 81 - - - - 81

Income tax benefit from
vested recognition and
retention plan shares,
exercise of stock options
and dividend payments
on unexercised stock
options and allocated
ESOP shares ................ - 310 - - - - 310

Compensation under
recognition and
retention plans ............ - 2,070 - - - - 2,070

Forfeiture of unvested
recognition and retention
plan shares
(23,460 shares) ............ - - - - - - -

Common stock held by ESOP
committed to be released
(40,581 shares) ............ - 275 - - - 221 496
--------- ----------- ----------- ---------- ----------- --------- ------------
Balance at
September 30, 2007........... $ 633 $ 511,758 $ 70,109 $ 7 $ (47,815) $ (3,209) $ 531,483
========= =========== =========== ========== =========== ========= ============

(Continued)

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Continued)
Nine Months Ended September 30, 2008 and 2007 (Unaudited)
(Dollars in thousands)

Accumulated Unallocated
Additional other common stock Total
Common paid-in Retained comprehensive Treasury held by stockholders'
stock capital earnings income (loss) stock ESOP equity
----------- ------------- ------------- ---------------- ------------ --------------- -------------

Balance at
December 31, 2007 .......... $ 633 $ 513,949 $ 68,875 $ 121 $ (61,735) $ (3,135) $ 518,708

Net income ................. - - 8,120 - - - 8,120

Other comprehensive
losses..................... - - - (1,485) - - (1,485)

Common stock dividends of
$0.655 per share .......... - - (37,706) - - - (37,706)

Payment of dividend
equivalent rights ......... - - (933) - - - (933)

Exercise of stock
options
(613,414 shares)........... 4 1,167 - - - - 1,171

Reload stock options
granted
(193,163 shares)........... - 97 - - - - 97

Treasury stock purchases
(40,100 shares) ........... - - - - (372) - (372)

Compensation under
recognition and
retention plans ........... - 1,595 - - - - 1,595

Common stock held by ESOP
committed to be released
(39,159 shares) ........... - 191 - - - 214 405
--------- ----------- ----------- ---------- ----------- --------- ------------
Balance at
September 30, 2008 ......... $ 637 $ 517,865 $ 38,356 $ (1,364) $ (62,107) $ (2,921) $ 490,466
========= =========== =========== ========== =========== ========= ============

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,
---------------------------
2008 2007
------------ -------------
(unaudited)
Cash flows from operating activities:
Net income........................................................................ $ 8,120 $ 14,043

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses..................................................... 7,855 3,860
Compensation under recognition and retention plans.............................. 1,595 2,070
Release of ESOP shares.......................................................... 405 496
Depreciation and amortization................................................... 1,004 1,092
Net accretion of securities premiums and discounts.............................. (533) (810)
Amortization of deferred loan origination costs................................. 8,043 7,553
Amortization of identified intangible assets.................................... 1,313 1,511
Accretion of acquisition fair value adjustments................................. (331) (612)
Amortization of mortgage servicing rights....................................... 19 16
Loss on write-downs and sales of securities, net................................ 2,849 -
Write-down of other real estate owned........................................... 67 -
Minority interest in earnings of subsidiary .................................... 172 154
Deferred income taxes........................................................... (2,388) (265)
(Increase) decrease in:
Accrued interest receivable.................................................. 721 413
Prepaid income taxes......................................................... 2,105 712
Other assets................................................................. (198) (697)
Increase in:
Income taxes payable......................................................... 5 -
Accrued expenses and other liabilities....................................... 679 2,330
------------ -------------
Net cash provided from operating activities................................ 31,502 31,866
------------ -------------

Cash flows from investing activities:
Proceeds from sales of securities available for sale.............................. 7,864 -
Proceeds from redemptions and maturities of securities available for sale......... 115,578 123,744
Proceeds from redemptions and maturities of securities held to maturity........... 25 38
Purchase of securities available for sale......................................... (123,755) (51,960)
Purchase of Federal Home Loan Bank of Boston stock................................ (7,175) -
Proceeds from redemptions of Federal Home Loan Bank of Boston stock............... - 2,004
Net increase in loans............................................................. (187,681) (110,445)
Purchase of bank premises and equipment........................................... (1,917) (1,072)
------------ -------------
Net cash used for investing activities..................................... (197,061) (37,691)
------------ -------------

(Continued)

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(In thousands)

Nine months ended
September 30,
---------------------------
2008 2007
------------ ------------
(unaudited)

Cash flows from financing activities:
Increase (decrease) in demand deposits and NOW, savings and money
market savings accounts....................................................... $ 93,248 $ (16,499)
(Decrease) increase in retail certificates of deposit............................. (43,189) 50,974
Decrease in brokered certificates of deposit...................................... (40,857) (10,069)
Proceeds from Federal Home Loan Bank of Boston advances........................... 3,957,943 739,500
Repayment of Federal Home Loan Bank of Boston advances............................ (3,778,772) (691,257)
Repayment of subordinated debt.................................................... (7,000) (5,000)
Increase in mortgagors' escrow accounts........................................... 751 315
Income tax benefit from vested recognition and retention plan shares,
exercise of stock options and dividend payments on unexercised stock
options and allocated ESOP shares .............................................. 866 310
Proceeds from exercise of stock options........................................... 1,171 777
Reload stock options granted...................................................... 97 81
Purchase of treasury stock........................................................ (372) (29,671)
Payment of dividends on common stock.............................................. (37,706) (39,181)
Payment of dividend equivalent rights............................................. (933) (982)
Payment of dividend to minority interest members of subsidiary.................... (268) (208)
------------ -------------
Net cash provided from (used for) financing activities..................... 144,979 (910)

Net decrease in cash and cash equivalents............................................ (20,580) (6,735)
Cash and cash equivalents at beginning of period..................................... 153,624 152,654
------------ -------------
Cash and cash equivalents at end of period........................................... $ 133,044 $ 145,919
============ =============

Supplemental disclosures of cash flow information: Cash paid during the
period for:
Interest on deposits and borrowed funds......................................... $ 52,590 $ 53,726
Income taxes.................................................................... 6,141 8,175

See accompanying notes to the unaudited consolidated financial statements.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2008 and 2007
(Unaudited)

(1) Summary of Significant Accounting Policies and Related Matters
--------------------------------------------------------------
(Dollars in thousands except per share amounts)
----------------------------------------------

Basis of Presentation

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 the accounts of its wholly owned subsidiary, BBS Investment
Corporation, and its 86.0% (86.3% at December 31, 2007) owned subsidiary,
Eastern Funding LLC ("Eastern").

The Company operates as one reportable segment for financial reporting
purposes. All significant intercompany transactions and balances are
eliminated in consolidation. Certain amounts previously reported have
been reclassified to conform to the current year's presentation.

The accompanying unaudited consolidated financial statements have been
prepared in accordance with U.S. 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, 2008 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2008.

(2) Investment Securities (Dollars in thousands)
-------------------------------------------

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

September 30, 2008
------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
------------ ------------ ------------ ------------
Securities available for sale:
Debt securities:
U.S. Government-sponsored enterprises..................... $ 11,800 $ 10 $ 27 $ 11,783
Municipal obligations..................................... 2,140 - 4 2,136
Auction rate municipal obligations........................ 5,200 - - 5,200
Corporate obligations..................................... 4,615 - 1,303 3,312
Collateralized mortgage obligations issued by U.S.
Government-sponsored enterprises....................... 109,561 711 - 110,272
Mortgage-backed securities issued by U.S.
Government-sponsored enterprises........................ 147,532 53 1,662 145,923
------------ ------------ ------------ ------------
Total debt securities................................. 280,848 774 2,996 278,626
Marketable equity securities............................... 1,501 133 395 1,239
------------ ------------ ------------ ------------
Total securities available for sale................... $ 282,349 $ 907 $ 3,391 $ 279,865
============ ============ ============ ============

Securities held to maturity:
Mortgage-backed securities issued by U.S.
Government-sponsored enterprises........................ $ 164 $ 8 $ - $ 172
============ ============ ============ ============

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2008 and 2007
(Unaudited)

December 31, 2007
-------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
------------ ------------- ------------- -------------
Securities available for sale:
Debt securities:
U.S. Government-sponsored enterprises.................... $ 80,621 $ 288 $ 5 $ 80,904
Municipal obligations.................................... 4,531 7 25 4,513
Auction rate municipal obligations....................... 13,050 - - 13,050
Corporate obligations ................................... 4,779 - 201 4,578
Other obligations ....................................... 500 - - 500
Collateralized mortgage obligations issued by U.S.
Government-sponsored enterprises....................... 129,137 532 118 129,551
Mortgage-backed securities issued by U.S.
Government-sponsored enterprises....................... 47,182 79 357 46,904
------------ ------------- ------------- -------------
Total debt securities ............................... 279,800 906 706 280,000
Marketable equity securities ............................. 4,464 176 589 4,051
------------ ------------- ------------- -------------
Total securities available for sale ................. $ 284,264 $ 1,082 $ 1,295 $ 284,051
============ ============= ============= =============

Securities held to maturity:
Mortgage-backed securities issued by U.S.
Government-sponsored enterprises........................ $ 189 $ 10 $ - $ 199
============ ============ ============ ============

Debt securities of U.S. Government-sponsored enterprises include
obligations issued by Fannie Mae, Freddie Mac, Ginnie Mae, 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 except for
mortgage-backed securities issued by Ginnie Mae amounting to $4 at
September 30, 2008 and $16 at December 31, 2007.

(3) Loans (Dollars in thousands)
---------------------------

A summary of loans follows:

September 30, December 31,
2008 2007
--------------- --------------
Mortgage loans:
One-to-four family ........................................................... $ 354,997 $ 296,329
Multi-family ................................................................. 318,986 316,198
Commercial real estate ....................................................... 471,376 396,027
Construction and development ................................................. 41,374 26,807
Home equity .................................................................. 39,113 35,110
Second ....................................................................... 26,547 23,878
------------- -------------
Total mortgage loans ....................................................... 1,252,393 1,094,349
Indirect automobile loans ....................................................... 604,502 594,332
Commercial loans - Eastern ...................................................... 143,432 141,675
Other commercial loans .......................................................... 175,532 154,442
Other consumer loans ............................................................ 3,962 3,909
------------- -------------
Total gross loans .......................................................... 2,179,821 1,988,707
Unadvanced funds on loans ....................................................... (132,035) (114,651)
Deferred loan origination costs:
Indirect automobile loans .................................................... 15,923 15,445
Commercial loans - Eastern.................................................... 777 824
Other ........................................................................ 1,262 571
------------- -------------
Total loans ................................................................ $ 2,065,748 $ 1,890,896
============= =============

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2008 and 2007
(Unaudited)

(4) Allowance for Loan Losses (Dollars in thousands)
------------------------------------------------

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

Nine month ended
September 30,
--------------------------
2008 2007
------------ ------------

Balance at beginning of period ............................................ $ 24,445 $ 23,024
Provision for loan losses ................................................. 8,159 3,701
Charge-offs................................................................ (6,087) (3,954)
Recoveries................................................................. 715 690
------------ ------------
Balance at end of period................................................... $ 27,232 $ 23,461
============ ============

The liability for unfunded credit commitments was reduced by a credit of
$304 to the provision for credit losses during the nine months ended
September 30, 2008 and was increased by a charge of $159 to the provision
for credit losses during the nine months ended September 30, 2007. Such
liability, which is included in other liabilities, was $1,183 at
September 30, 2008 and $1,487 at December 31, 2007.

(5) Deposits (Dollars in thousands)
------------------------------

A summary of deposits follows:

September 30, December 31,
2008 2007
------------- --------------

Demand checking accounts.......................................................... $ 68,322 $ 66,538
NOW accounts...................................................................... 85,590 84,875
Savings accounts.................................................................. 67,645 67,351
Guaranteed savings accounts....................................................... 18,189 19,799
Money market savings accounts..................................................... 307,452 215,387
Retail certificate of deposit accounts............................................ 753,196 796,387
------------- -------------
Total retail deposits......................................................... 1,300,394 1,250,337
Brokered certificates of deposit.................................................. 27,047 67,904
------------- -------------
Total deposits................................................................ $ 1,327,441 $ 1,318,241
============= =============

(6) Accumulated Other Comprehensive Loss (Dollars in thousands)
----------------------------------------------------------

Accumulated other comprehensive loss at September 30, 2008 was comprised
of unrealized losses on securities available for sale, net of income
taxes, of $1,598 and an unrealized gain related to postretirement
benefits, net of income taxes, of $234. Accumulated other comprehensive
income at December 31, 2007 was comprised of an unrealized loss on
securities available for sale, net of income taxes, of $121 and an
unrealized gain related to postretirement benefits, net of income taxes,
of $242. At September 30, 2008 and December 31, 2007, the resulting net
deferred tax asset and net deferred tax liability, amounted to $718 and
$83, respectively.

(7) Commitments and Contingencies (Dollars in thousands)
---------------------------------------------------

Loan Commitments

At September 30, 2008, the Company had outstanding commitments to
originate loans of $75,686, $6,760 of which were one-to-four family
mortgage loans, $22,961 were commercial real estate mortgage loans,
$21,093 were multi-family mortgage loans, $3,642 were commercial loans to
condominium associations and $21,230 were commercial loans. Unused lines
of credit available to customers were $57,930, of which $52,541 were
equity lines of credit.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2008 and 2007
(Unaudited)

Legal Proceedings

On February 21, 2007, Carrie E. Mosca filed a putative class action
complaint against Brookline Bank in the Superior Court for the
Commonwealth of Massachusetts (the "Action"). Ms. Mosca defaulted on a
loan obligation on an automobile that she co-owned. She alleges that the
form of notice of sale of collateral that the Bank sent to her after she
and the co-owner became delinquent on the loan obligation did not
contain information required to be provided to a consumer under the
Massachusetts Uniform Commercial Code. The Action purports to be brought
on behalf of a class of individuals who purchased motor vehicles from
dealers located in Massachusetts and to whom the Bank sent the same form
of notice of sale of collateral during the four year period prior to the
filing of the Action. The Action seeks statutory damages, an order
restraining the Bank from future use of the form of notice sent to Ms.
Mosca, an order barring the Bank from recovering any deficiency from
other individuals to whom it sent the same form of notice, attorneys'
fees, litigation expenses and costs. The Bank has answered, denying
liability and has opposed Plaintiff's motion to certify a class. The
Court denied Plaintiff's motion for class certification in an order
dated July 18, 2008. Plaintiff has moved for summary judgment seeking an
award of statutory damages in the amount of $3 to her individually. The
Bank has opposed that motion and oral argument is scheduled to be heard
on November 18, 2008.

In addition to the above matter, the Company and its subsidiaries are
involved in litigation that is considered incidental to the business of
the Company. Management believes the results of such litigation will be
immaterial to the consolidated financial condition or results of
operations of the Company.

(8) Dividend Declaration
--------------------

On October 16, 2008, the Board of Directors of the Company approved a
regular quarterly dividend of $0.085 per share payable November 14, 2008
to stockholders of record on October 31, 2008.

(9) Share-Based Payment Arrangements (Dollars in thousands, except per share
------------------------------------------------------------------------
amounts)
-------

Recognition and Retention Plans

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.

Total expense for the RRP plans amounted to $532, $666, $1,595 and
$2,070 for the three months and nine months ended September 30, 2008 and
2007, respectively. The compensation cost of non-vested RRP shares at
September 30, 2008 is expected to be charged to expense as follows: $532
during the three month period ended December 31, 2008 and $137 during
the year ended December 31, 2009. As of September 30, 2008, the number
of shares available for award under the 1999 RRP and the 2003 RRP were
29,774 shares and 132,920 shares, respectively.

Stock Option Plans

The Company has two stock option plans, the "1999 Option Plan" and the
"2003 Option Plan". Under both of the plans, shares of the Company's
common stock were reserved for issuance to directors, employees and
non-employee directors of the Company. Shares issued upon the exercise of
a stock option may be either authorized but unissued shares or reacquired
shares held by the Company as treasury shares. Any shares subject to an
award which expire or are terminated unexercised will again be available
for issuance under the plans. The exercise price of options awarded is
the fair market value of the common stock of the Company on the date the
award is made. Options vest over periods ranging from less than one month
through over five years. Part of the options granted under the 1999
Option Plan and all of the options granted under the 2003 Option Plan
include a reload feature whereby an optionee exercising an option by
delivery of shares of common stock would automatically be granted an
additional option at the fair market value of stock when such additional
option is granted equal to the number of shares so delivered. If an
individual to whom a stock option was granted ceases to maintain
continuous service by reason of normal retirement, death or disability,
or following a change in control, all options and

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2008 and 2007
(Unaudited)

rights granted and not fully exercisable become exercisable in full upon
the happening of such an event and shall remain exercisable for a period
ranging from three months to five years.

Total expense for the stock option plans amounted to $97 and $81 for the
nine months ended September 30, 2008 and 2007, respectively.

Activity under the Company's stock option plans for the nine months ended
September 30, 2008 was as follows:

Options outstanding at January 1, 2008........................................... 2,722,960
Options exercised at $4.944 per option .......................................... (613,414)
Reload options granted at:
$ 9.19 per option............................................................. 130,518
$ 9.85 per option............................................................. 25,378
$ 10.10 per option............................................................ 37,267
Options forfeited at:
$ 12.91 per option............................................................ (40,000)
$ 15.02 per option............................................................ (4,000)
-----------
Options outstanding at September 30, 2008........................................ 2,258,709
===========

Exercisable at September 30, 2008 at:
$ 4.944 per option............................................................ 635,883
$ 9.19 per option............................................................. 130,518
$ 9.85 per option............................................................. 25,378
$ 10.10 per option............................................................ 37,267
$ 10.36 per option............................................................ 28,717
$ 10.59 per option............................................................ 23,861
$ 10.69 per option............................................................ 46,249
$ 10.87 per option............................................................ 56,836
$ 12.91 per option............................................................ 2,000
$ 15.02 per option............................................................ 1,269,000
-----------
2,255,709
===========

Aggregate intrinsic value of options outstanding and exercisable ............... $ 5,962
==========

Weighted average exercise price per option ..................................... $ 11.40
=======
Weighted average remaining contractual life in years at end of period .......... 3.19
=======

As of September 30, 2008, the number of options available for award under
the Company's 1999 Stock Option Plan and 2003 Stock Option Plan were
285,980 options and 1,226,000 options, respectively.

Employee Stock Ownership Plan

The Company maintains an ESOP to provide eligible employees the
opportunity to own Company stock. Employees are eligible to participate
in the Plan after reaching age twenty-one, completion of one year of
service and working at least one thousand hours of consecutive service
during the year. Contributions are allocated to eligible participants on
the basis of compensation, subject to federal tax law limits.

A loan obtained by the ESOP from the Company to purchase Company common
stock is payable in quarterly installments over 30 years and bears
interest at 8.50% per annum. The loan can be prepaid without penalty.
Loan payments are principally funded by cash contributions from the Bank,
subject to federal tax law limits. The outstanding balance of the loan at
September 30, 2008 and December 31, 2007, which was $3,564 and $3,752,
respectively, is eliminated in consolidation. Shares used as collateral
to secure the loan are released and available for allocation to eligible
employees as the principal and interest on the loan is paid. Employees
vest in their ESOP account at a rate of 20% annually commencing in the
year of completion of three years of credited service or immediately if
service is terminated due to death, retirement, disability or change in
control. Dividends on released shares are credited to the participants'
ESOP accounts. Dividends on unallocated shares are generally applied
towards payment of the loan. ESOP shares committed to be released are
considered outstanding in determining earnings per share.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2008 and 2007
(Unaudited)

At September 30, 2008, the ESOP held 535,815 unallocated shares at an
aggregate cost of $2,921; the market value of such shares at that date
was $6,853. For the nine months ended September 30, 2008 and 2007, $405
and $496, respectively, was charged to compensation expense based on the
commitment to release to eligible employees 39,159 shares and 40,581
shares in those respective periods.

(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 components of net periodic
postretirement benefit costs for the three months and nine months ended
September 30, 2008 and 2007:

Three months ended Nine months ended
September 30, September 30,
----------------------- ----------------------
2008 2007 2008 2007
--------- --------- --------- --------

Service cost................................................. $ 17 $ 14 $ 52 $ 43
Interest cost................................................ 12 11 37 33
Prior service cost........................................... (7) (7) (20) (21)
Actuarial gain .............................................. (6) (3) (12) (1)
-------- -------- -------- --------
Net periodic benefit costs............................. $ 16 $ 15 $ 57 $ 54
======== ======== ======== ========

Benefits paid amounted to $11 and $11 for the nine months ended
September 30, 2008 and 2007, respectively.

(11) Stockholders' Equity (Dollars in thousands)
------------------------------------------

Capital Distributions and Restrictions Thereon

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

Common Stock Repurchases

During the nine months ended September 30, 2008, 40,100 shares of the
Company's common stock were repurchased at an average cost of $9.29,
exclusive of transaction costs.

As of September 30, 2008, the Company was authorized to repurchase up to
4,804,410 shares of its common stock. The Board of Directors has
delegated to the discretion of the Company's senior management the
authority to determine the timing of the repurchases and the prices at
which the repurchases will be made.

Restricted Retained Earnings

As part of the stock offering in 2002 and as required by regulation,
Brookline Bank established a liquidation account for the benefit of
eligible account holders and supplemental eligible account holders who
maintain their deposit accounts at Brookline Bank after the stock
offering. In the unlikely event of a complete liquidation of Brookline
Bank (and only in that event), eligible depositors who continue to
maintain deposit accounts at Brookline Bank would be entitled to receive
a distribution from the liquidation account. Accordingly, retained
earnings of the Company are deemed to be restricted up to the balance of
the liquidation account. The liquidation account balance is reduced
annually to the extent that eligible depositors have reduced their
qualifying deposits as of each anniversary date. Subsequent increases in
deposit account balances do not restore an account holder's interest in
the liquidation account. The liquidation account totaled $33,151 at
December 31, 2007.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2008 and 2007
(Unaudited)

(12) Fair Value Disclosures (Dollars in thousands)
--------------------------------------------

Effective January 1, 2008, the Company adopted Statement of Financial
Accounting Standards No. 157 ("SFAS 157"), "Fair Value Measurements",
which provides a framework for measuring fair value under U.S. generally
accepted accounting principles. SFAS 157 defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. In addition, SFAS 157 specifies a hierarchy of
valuation techniques based on whether the inputs to those techniques are
observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect the
Company's market assumptions. These two types of inputs have the
following fair value hierarchy:

Level 1 - Quoted prices for identical instruments in active markets
Level 2 - Quoted prices for similar instruments in active
or non-active markets and model-derived valuations in
which all significant inputs and value drivers are
observable in active markets
Level 3 - Valuation derived from significant unobservable inputs

The Company uses fair value measurements to record certain assets at
fair value on a recurring basis. Additionally, the Company may be
required to record at fair value other assets on a nonrecurring basis.
These nonrecurring fair value adjustments typically involve the
application of lower-of-cost-or market value accounting or write-downs
of individual assets. In accordance with Financial Accounting Standards
Board ("FASB") Staff Position No. 157-2, "Effective Date of FASB
Statement No. 157", we have delayed the application of SFAS 157 for
non-financial assets, such as goodwill and real property held for sale,
and non-financial liabilities until January 1, 2009.

The following table presents the balances of certain assets reported at
fair value as of September 30, 2008:

Carrying Value
-------------------------------------------------
Level 1 Level 2 Level 3 Total
---------- ------------ ----------- -----------
Assets measured at fair value on a recurring basis:
Securities available for sale......................... $ 1,239 $ 272,926 $ 5,700 $ 279,865
========== ============ =========== ===========

Assets measured at fair value on a non-recurring basis:
Collateral dependent impaired loans................... $ - $ 2,000 $ - $ 2,000
========== ============ =========== ===========

The securities comprising the balance at September 30, 2008 in the level
3 column included $5,200 of auction rate municipal obligations and $500
of trust preferred obligations issued by a financial institution, all of
which lacked quoted prices in active markets. In the judgment of
management, the fair value of these securities was considered to
approximate their carrying value because they were deemed to be fully
collectible and the rates paid on the securities were at least equal to
rates paid on securities with similar maturities. While it is possible
that unrealized depreciation may have existed at September 30, 2008 with
respect to the auction rate municipal obligations, such unrealized
depreciation, if any, would be immaterial to the Company's consolidated
financial statements as of and for the nine months ended September 30,
2008 and would not be considered as other-than-temporary in nature.

Between July 1, 2008 and September 30, 2008, the fair value of
securities available for sale using significant unobservable inputs
(level 3) declined by $1,200 as a result of $300 of sales of auction
rate municipal obligations at their face value, the full payment of a
$500 debt obligation and the movement of a $400 trust preferred security
to level 2.

Collateral dependent loans that are deemed to be impaired are valued
based upon the fair value of the underlying collateral. The inputs used
in the appraisals of the collateral are observable, and, therefore, the
loans are categorized as level 2.

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

Forward Looking Statements

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

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

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

Executive Level Overview

The following is a summary of operating and financial condition
highlights as of and for the three months and nine months ended
September 30, 2008 and 2007.

Operating Highlights
--------------------

Three months ended Nine months ended
September 30, September 30,
--------------------------- --------------------------
2008 2007 2008 2007
------------- ------------- ------------- ------------
(In thousands except per share amounts)

Net interest income.......................................... $ 19,342 $ 17,997 $ 54,547 $ 54,182
Provision for credit losses.................................. 3,162 1,503 7,855 3,860
Loss on write-downs and sales of securities, net............. (1,600) - (2,849) -
Non-interest income.......................................... 958 927 3,075 3,257
Amortization of identified intangible assets ................ 438 503 1,313 1,510
Other non-interest expenses.................................. 10,719 9,892 30,582 28,940
Income before income taxes and minority interest............. 4,381 7,026 15,023 23,129
Provision for income taxes................................... 2,567 2,711 6,731 8,932
Minority interest in earnings of subsidiary.................. 63 66 172 154
Net income ................................................. 1,751 4,249 8,120 14,043

Basic earnings per common share.............................. $ 0.03 $ 0.07 $ 0.14 $ 0.24
Diluted earnings per common share............................ 0.03 0.07 0.14 0.23

Interest rate spread......................................... 2.46% 2.14% 2.24% 2.13%
Net interest margin.......................................... 3.18% 3.16% 3.06% 3.18%

Financial Condition Highlights
------------------------------

At At At
Sept. 30, December 31, Sept. 30,
2008 2007 2007
------------- ---------------- -------------
(In thousands)

Total assets .................................................... $ 2,572,986 $ 2,418,510 $ 2,391,906
Net loans........................................................ 2,038,516 1,866,451 1,868,626
Retail deposits ................................................. 1,300,394 1,250,337 1,244,642
Brokered deposits ............................................... 27,047 67,904 67,991
Borrowed funds and subordinated debt............................. 727,162 555,023 519,043
Stockholders' equity............................................ 490,466 518,708 531,483
Stockholders' equity to total assets............................ 19.06% 21.45% 22.22%

Allowance for loan losses........................................ $ 27,232 $ 24,445 $ 23,461
Non-performing assets............................................ 7,061 5,399 4,820

Among the factors that influenced the operating and financial
condition highlights summarized above were the following:

o The interest rate environment. Interest rate spread and net
interest margin are greatly influenced by the rate setting
actions of the Federal Open Market Committee (the "FOMC") of the
Federal Reserve System. The FOMC lowered the rate for overnight
federal fund borrowings between banks seven times from 5.25% on
September 18, 2007 (the rate that had been in effect since June
29, 2006) to 2.00% on April 30, 2008. (The rate was lowered to
1.50% on October 8, 2008 and to 1.00% on October 29, 2008.) The
rapidity of the rate reductions had an immediate negative effect
on the yield of the Company's assets adjustable to market rates
and those assets that either matured or were refinanced. The
impact on rates paid for certificates of deposit and borrowed
funds, however, was less rapid as many of those liabilities
matured later on. Interest rate spread and net interest margin
improved in the 2008 second quarter as maturing certificates of
deposit and borrowed funds were refinanced at lower rates. That
trend continued in the 2008 third quarter and is expected to
continue in the next few quarters. Recent turmoil in national and
international financial markets, however, could cause unexpected
changes in interest rates and economic conditions.

o Foregone interest income. As a result of repurchases of the
Company's common stock and the payment of semi-annual extra
dividends, the average balance of stockholders' equity was $41.4
million less in the 2008 third quarter than in the 2007 third
quarter and $46.8 million less in the first nine months of 2008
than in the first nine months of 2007. Foregone interest income
as a result of these reductions in stockholders' equity was
$612,000 ($356,000 after taxes) in the 2008 third quarter and
$2,108,000 ($1,226,000 after taxes) in the first nine months of
2008.

o Higher provisions for credit losses. The provision for credit
losses was $1,659,000 ($965,000 after taxes) higher in the 2008
third quarter than in the 2007 third quarter and $3,995,000
($2,324,000 after taxes) higher in the first nine months of 2008
than in the first nine months of 2007 due primarily to rising
charge-offs in the indirect automobile ("auto") loan portfolio
and growth in the mortgage and commercial loan portfolios.

o Loss on write-downs and sales of securities. A loss of $1,249,000
($801,000 after taxes) was recognized in the 2008 first quarter
as a result of the write-down of the carrying value of perpetual
preferred stock issued by the Federal National Mortgage
Association ("FNMA") and Merrill Lynch & Co., Inc. ("Merrill")
and owned by the Company to market value as of March 31, 2008. An
additional loss of $1,598,000 ($1,536,000 after taxes) was
recognized in the 2008 third quarter as a result of the
write-down and sales of perpetual preferred stock issued by FNMA.

o Assets quality and stockholders' equity remain strong.
Non-performing assets remained modest at $7.1 million, or 0.27%
of total assets at September 30, 2008 compared to $6.9 million
(0.28%) at June 30, 2008 and $5.4 million (0.22%) at December 31,
2007. The allowance for loan losses ($27.2 million) equaled 1.32%
of total loans outstanding at September 30, 2008 and
stockholders' equity was $490.5 million, resulting in an equity
to assets ratio of 19.1% as of that date.

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

The following tables set forth information about the Company's average
balances, interest income and rates earned on average interest-earning
assets, interest expense and rates paid on interest-bearing liabilities,
interest rate spread and net interest margin for the three months and
nine months ended September 30, 2008 and 2007. 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,
---------------------------------------------------------------------------------
2008 2007
--------------------------------------- ----------------------------------------
Average Average
Average yield/ Average yield/
balance Interest(1) cost balance Interest(1) cost
------------ ------------ ------------ ------------- ------------ ------------
(Dollars in thousands)
Assets
Interest-earning assets:
Short-term investments............. $ 94,610 $ 559 2.35% $ 134,882 $ 1,759 5.17%
Debt securities (2)................ 294,760 3,421 4.64 269,968 3,428 5.08
Equity securities (2).............. 36,490 333 3.63 27,704 490 7.02
Mortgage loans ((3)) .............. 1,142,801 16,775 5.87 1,029,843 16,316 6.34
Commercial loans - Eastern Funding
((3)) 143,568 3,426 9.55 140,105 3,703 10.57
Other commercial loans (3)......... 109,176 1,491 5.46 76,076 1,358 7.14
Indirect automobile loans (3) ..... 617,235 9,985 6.42 616,968 9,815 6.31
Other consumer loans (3)........... 4,062 58 5.71 3,450 66 7.65
----------- ---------- ----------- ----------
Total interest-earning assets.... 2,442,702 36,048 5.89% 2,298,996 36,935 6.41%
---------- ------ ---------- -------
Allowance for loan losses............. (25,730) (23,310)
Non-interest earning assets........... 101,694 99,626
------------ -------------
Total assets..................... $ 2,518,666 $ 2,375,312
============ =============

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
NOW accounts..................... $ 85,104 52 0.24% $ 81,869 63 0.31%
Savings accounts................. 90,290 301 1.32 90,684 360 1.57
Money market savings accounts.... 259,633 1,483 2.27 224,967 1,628 2.87
Retail certificates of deposit .. 774,146 7,161 3.67 767,063 9,425 4.87
------------ ---------- ------------- ----------
Total retail deposits......... 1,209,173 8,997 2.95 1,164,583 11,476 3.91
Brokered certificates of deposit 27,047 366 5.37 74,996 1,019 5.39
------------ ---------- ------------- ----------
Total deposits................ 1,236,220 9,363 3.00 1,239,579 12,495 4.00
Borrowed funds..................... 691,465 7,286 4.12 502,870 6,211 4.83
Subordinated debt.................. - - - 7,034 140 7.79
------------ ---------- ------------- -----------
Total interest-bearing
liabilities................. 1,927,685 16,649 3.43% 1,749,483 18,846 4.27%
---------- ------ ----------- -------
Non-interest-bearing demand 68,123 63,405
checking accounts.................
Other liabilities..................... 27,299 25,470
------------ -------------
Total liabilities.............. 2,023,107 1,838,358
Stockholders' equity.................. 495,559 536,954
------------ -------------
Total liabilities and
stockholders' equity..... $ 2,518,666 $ 2,375,312
============ =============
Net interest income (tax equivalent
basis)/interest rate spread (4) .. 19,399 2.46% 18,089 2.14%
====== =======
Less adjustment of tax exempt income.. 57 92
---------- -----------
Net interest income................... $ 19,342 $ 17,997
========== ===========
Net interest margin (5) ............ 3.18% 3.16%
====== =======

------------------------------------------------
(1) Tax exempt income on equity securities and municipal obligations is included on a tax equivalent basis.
(2) Average balances include unrealized gains (losses) on securities available for sale. Equity securities include
marketable equity securities (preferred and common stocks) and restricted equity securities.
(3) Loans on non-accrual status are included in average balances.
(4) Interest rate spread represents the difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.

Nine months ended September 30,
----------------------------------------------------------------------------------
2008 2007
--------------------------------------- ----------------------------------------
Average Average
Average yield/ Average yield/
balance Interest(1) cost balance Interest(1) cost
------------ ------------ ------------ ------------- ------------ ------------
(Dollars in thousands)
Assets
Interest-earning assets:
Short-term investments............. $ 92,993 $ 1,971 2.83% $ 134,722 $ 5,242 5.19%
Debt securities (2) ............... 303,685 10,721 4.71 290,825 11,023 5.01
Equity securities (2) ............. 34,253 1,235 4.81 27,990 1,430 6.78
Mortgage loans (3) ................ 1,092,722 48,902 5.97 1,033,393 49,538 6.39
Commercial loans - Eastern Funding
(3) 143,395 10,468 9.73 132,475 10,629 10.70
Other commercial loans (3)......... 108,217 4,603 5.67 71,459 3,816 7.12
Indirect automobile loans (3)...... 610,863 29,382 6.41 591,590 27,001 6.09
Other consumer loans (3) .......... 3,886 186 6.38 3,336 197 7.87
------------- ---------- ------------- ----------
Total interest-earning assets ... 2,390,014 107,468 6.00% 2,285,790 108,876 6.35%
---------- ------- ---------- -------
Allowance for loan losses............. (24,974) (23,150)
Non-interest earning assets .......... 100,342 98,893
------------- -------------
Total assets..................... $ 2,465,382 $ 2,361,533
============= =============

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
NOW accounts..................... $ 84,385 189 0.30% $ 85,148 203 0.32%
Savings accounts ................ 89,437 929 1.38 95,335 1,164 1.63
Money market savings accounts.... 236,399 4,211 2.38 218,783 4,596 2.80
Retail certificates of deposit... 801,836 25,344 4.21 756,401 27,369 4.82
------------- ---------- ------------- ----------
Total retail deposits......... 1,212,057 30,673 3.37 1,155,667 33,332 3.85
Brokered certificates of deposit 45,674 1,846 5.39 76,797 3,092 5.37
------------- ---------- ------------- ----------
Total deposits................ 1,257,731 32,519 3.45 1,232,464 36,424 3.94
Borrowed funds .................... 608,825 20,089 4.40 475,446 17,371 4.87
Subordinated debt ................. 1,150 65 7.54 9,106 531 7.78
------------- ---------- ------------- ----------
Total interest bearing
liabilities................. 1,867,706 52,673 3.76% 1,717,016 54,326 4.22%
---------- ------- ---------- -------
Non-interest-bearing demand
checking accounts................. 62,521 62,521
Other liabilities..................... 25,176 25,176
------------- -------------
Total liabilities.............. 1,955,403 1,804,713
Stockholders' equity.................. 509,979 556,820
------------- -------------
Total liabilities and
stockholders' equity.... $ 2,465,382 $ 2,361,533
============= =============
Net interest income (tax equivalent
basis)/interest rate spread (4)... 54,795 2.24% 54,550 2.13%
======= =======
Less adjustment of tax exempt income.. 248 368
---------- ----------
Net interest income................... $ 54,547 $ 54,182
========== ==========
Net interest margin (5) ............. 3.06% 3.18 %
======= =======

--------------------------------
(1) Tax exempt income on equity securities and municipal obligations is included on a tax equivalent basis.
(2) Average balances include unrealized gains (losses) on securities available for sale. Equity securities include
marketable equity securities (preferred and common stocks) and restricted equity securities.
(3) Loans on non-accrual status are included in average balances.
(4) Interest rate spread represents the difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.

o Interest rate spread improved from 2.13% in the 2007 nine month
period to 2.24% in the 2008 nine month period and from 2.14% in
the 2007 third quarter to 2.21% in the 2008 second quarter and
2.46% in the 2008 third quarter. The improvements were due
primarily to the effect of the changes in the overnight borrowing
rate set by the FOMC and the growth of the mortgage and
commercial loan portfolios.

o Net interest margin declined from 3.18% in the 2007 nine month
period to 3.06% in the 2008 nine month period and from 3.16% in
the 2007 third quarter to 3.03% in the 2008 second quarter, but
improved to 3.18% in the 2008 third quarter. The declines
resulted primarily from the foregone interest income mentioned
earlier while the improvement in the most recent quarter was due
primarily to a more significant reduction in the average rate
paid on deposits and borrowings (29 basis points) than in the
average yield on interest-earning assets (4 basis points).

o Certificates of deposit comprised 64.0% of the average balance of
total retail deposits in the 2008 third quarter compared to 66.8%
in the 2008 second quarter, 67.7% in the 2008 first quarter and
66.2% in the 2007 nine month period. Offsetting the reduction in
certificates of deposit in the 2008 third quarter was a rise in
money market savings accounts from 18.6% of the average balance
of total retail deposits in the 2008 second quarter to 21.5% in
the 2008 third quarter. Since money market savings accounts can
be withdrawn at any time, the interest rate paid on those
deposits is generally lower than the interest rate paid on
certificates of deposit. The average rate paid on money market
savings accounts in the 2008 third quarter was 2.27% compared to
the average rate of 3.67% paid on certificates of deposit. We
believe the shift in the mix of deposits was attributable
primarily to the recent turmoil in financial markets which led a
number of depositors to place their funds in more liquid
accounts.

o In the 2008 third quarter, $491 million of certificates of
deposit and advances from the Federal Home Loan Bank ("FHLB")
with a weighted average rate of 4.23% matured while $627 million
of certificates of deposit and FHLB advances were added or rolled
over in that time period at a weighted average rate of 2.86%. In
the first nine months of 2008, $1.174 billion of certificates of
deposit and FHLB advances with a weighted average rate of 4.36%
matured while $1.422 billion of certificates of deposit and FHLB
advances were added or rolled over in that time period at a
weighted average rate of 3.02%. The resulting reductions in
funding costs had a significant positive effect on net interest
income during the first nine months of 2008.

o The average balance of loans outstanding as a percent of the
average balance of total interest-earning assets increased from
80.2% in the 2007 nine month period to 82.0% in the 2008 nine
month period and 82.6% in the 2008 third quarter. Generally, the
yield on loans is higher than the yield on investment securities.

o The average balance of short-term investments in the 2008 nine
month period was $41.7 million (31.0%) less than in the 2007 nine
month period. The average rate earned on those investments in
those respective periods was 2.83% and 5.19%. The reduction in
short-term investments was used primarily to fund part of the
loan growth.

o The average balance of interest-earning assets in the 2008 third
quarter was $51 million higher than in the 2008 second quarter
and $144 million higher than in the 2007 third quarter. All of
the most recent quarter growth and most of the growth since the
2007 third quarter was in mortgage loans.

o The average balance of borrowings from the FHLB rose from $503
million in the 2007 third quarter to $691 million in the 2008
third quarter. Of the $188 million increase, $89 million occurred
in the 2008 third quarter and $70 million in the 2008 second
quarter. The additional borrowings were used to fund part of the
loan growth and the $41 million reduction in stockholders' equity
resulting primarily from stock repurchases and the payment of
semi-annual extra dividends, and to pay down brokered deposits
($48 million) and subordinated debt ($7 million). The average
rate paid on FHLB borrowings declined from 4.83% in the 2007
third quarter to 4.12% in the 2008 third quarter.

Auto Loans

The auto loan portfolio amounted to $605 million at September 30, 2008
compared to $594 million at December 31, 2007 and $606 million at
September 30, 2007. Due to rising delinquencies and charge-offs and
deteriorating trends in the economy and the auto industry, the Company
took steps in the second half of 2007 to tighten its underwriting
criteria. Also, effective July 1, 2008, the Company curtailed dealer
accommodation loans due to higher credit risks normally associated with
such loans.

The changes in underwriting mentioned above have had a positive effect
on loan quality. Loans originated to borrowers with credit scores below
660 declined from $35.6 million, or 12.8% of the loans originated in the
first nine months of 2007, to $13.4 million, or 5.7% of the loans
originated in the first nine months of 2008, and to $2.9 million, or
3.6% of the loans originated in the 2008 third quarter. The average
credit score of loans originated in the 2008 third quarter was 756
compared to the average credit score of 732 for auto loans outstanding
at September 30, 2008.

Auto loans delinquent 30 days or more at September 30, 2008 were $10.4
million (1.72% of the portfolio) compared to $9.8 million (1.64%) at
June 30, 2008 and $11.7 million (1.98%) at December 31, 2007. According
to data published by the American Bankers Association, the rate of all
indirect auto loans in Massachusetts delinquent 30 days or more at June
30, 2008 (the latest date available) was 2.44%.

Auto loan net charge-offs increased from $1,232,000 in the 2007 third
quarter (an annualized rate of 0.82% based on average loans outstanding)
to $1,749,000 (1.16%) in the 2008 third quarter. Net charge-offs were
$2,527,000 (0.58%) in the first nine months of 2007 compared to
$4,808,000 (1.08%) in the first nine months of 2008. The increases
resulted from a weakening economy as well as higher per unit losses from
sales of repossessed vehicles caused in part by higher fuel prices.

Provision for Credit Losses

The provision for credit losses was $3,162,000 in the 2008 third quarter
compared to $1,503,000 in the 2007 third quarter and $7,855,000 in the
2008 nine month period compared to $3,860,000 in the 2007 nine month
period. The provision is comprised of amounts relating to the auto loan
portfolio, the Eastern Funding LLC ("Eastern") loan portfolio and the
remainder of the Company's loan portfolio and unfunded commitments.

The provision for auto loan losses was $2,600,000 in the 2008 third
quarter compared to $1,389,000 in the 2007 third quarter and $6,346,000
in the 2008 nine month period compared to $3,012,000 in the 2007 nine
month period. All of these amount exceeded the net charge-offs in those
respective periods. (See the second preceding paragraph above for the
amounts of net charge-offs). Constant provisions in excess of net
charge-offs has resulted in the allowance for auto loan losses growing
from $4,662,000 (0.77% of loans outstanding) at September 30, 2007 to
$5,662,000 (0.95%) at December 31, 2007 and $7,200,000 (1.19%) at
September 30, 2008.

The provision for Eastern loan losses was $242,000 in the 2008 third
quarter compared to $114,000 in the 2007 third quarter and $639,000 in
the 2008 nine month period compared to $823,000 in the 2007 nine month
period. Net charge-offs in the nine month periods were $559,000 in 2008
(an annualized rate of 0.52% based on the average balance of loans
outstanding) compared to $742,000 in 2007 (0.75% annualized rate).
Eastern loans delinquent 30 days or more increased to $2,762,000 (1.93%
of loans outstanding) at September 30, 2008 from $2,485,000 (1.72%) at
June 30, 2008 and $2,699,000 (1.91%) at December 31, 2007. The allowance
for Eastern loan losses at September 30, 2008 was $2,507,000, or 1.75%
of Eastern's $143 million portfolio.

The remainder of the Company's loan portfolio (net of unadvanced funds),
which equaled $1.295 billion at September 30, 2008, was comprised of
commercial real estate mortgage loans ($454 million), residential
mortgage loans ($354 million), multi-family mortgage loans ($310
million), commercial loans ($110 million), construction loans ($24
million) and home equity and other consumer loans ($43 million). These
parts of the portfolio, which grew only $27 million in the year 2007,
grew $75 million in the 2008 third quarter and $162 million in the first
nine months of 2008. Growth in the nine month period was concentrated
primarily in commercial real estate mortgage loans ($73 million),
residential mortgage loans ($60 million) and multi-family mortgage loans
($15 million).

The provision for loan losses related to the portfolio addressed in the
preceding paragraph was $650,000 in the 2008 third quarter and
$1,200,000 in the 2008 nine month period. The provisions were
established solely due to loan growth as no loan charge-offs were
experienced other than an inconsequential amount of consumer loans. In
the 2007 third quarter and nine month period, $60,000 and $134,000,
respectively, were credited to the provision for loan losses due
primarily to the lack of loan growth and pay down of loans with problem
characteristics.

The liability for unfunded credit commitments was reduced by a $330,000
credit to the provision for credit losses in the 2008 third quarter and
a $304,000 credit to the provision for credit losses in the 2008 nine
month period. The reductions were made because management considered the
risks associated with unfunded commitments to be less than had been
estimated in periods prior to the 2008 third quarter. In the 2007 third
quarter and nine month period, the liability for unfunded commitments
was increased by charges to the provision for credit losses of $60,000
and $159,000, respectively.

Valuation of Investment Securities

FNMA Perpetual Preferred Stock

Brookline Securities Corp. ("BSC"), a wholly-owned subsidiary of the
Company, acquired 100,000 shares of FNMA perpetual preferred stock on
October 26, 2007 at a total cost of $2,520,000. Thereafter and through
the first quarter of 2008, the market value of the stock declined due to
announcement of significant losses by FNMA in connection with its
involvement in the mortgage lending and mortgage securities markets. The
magnitude of the losses prompted FNMA to raise additional capital. Based
on these developments, the Company concluded that an
other-than-temporary impairment in the value of its FNMA stock had
occurred. The carrying value of the stock was written down to its
$1,747,000 market value at March 31, 2008 by a $773,000 pre-tax charge
to earnings. At June 30, 2008, the market value of the FNMA stock rose
to $1,810,000.

As stated in a Form 8-K filed by the Company on September 9, 2008, the
United States Department of the Treasury and the Federal Housing Finance
Agency ("FHFA") announced on September 7, 2008 that FNMA was placed
under conservatorship and that management of FNMA would be under the
control of FHFA, its regulator. The Plan announced by the U.S.
Government included, among other things, the elimination of dividends on
FNMA common and preferred stocks and an agreement by the U.S. Government
to provide equity capital to cover mortgage defaults in return for $1
billion of senior preferred stock in FNMA and warrants for the purchase
of 79.9% of the common stock of FNMA. On the day following the
announcement, the market value of the Company's FNMA perpetual preferred
stock declined dramatically to $190,000.

Based on the developments described above, we concluded that further
other-than-temporary impairment in the carrying value of the FNMA
perpetual preferred stock had occurred. During September, we sold 12,900
shares at a loss of $212,000 for financial reporting purposes. The
carrying value of the remaining 87,100 shares at September 30, 2008 was
written down to its $135,000 market value at that date by a $1,386,000
pre-tax charge to earnings.

For income tax purposes, losses on common stock and preferred stocks are
recognized upon sale as capital losses. An income tax benefit can be
realized only if the capital losses are offset by capital gains realized
in the current year or three preceding years. The Company realized
capital gains of $1,455,000 in the three preceding years. Since an
income tax benefit was recognized in connection with the $1,249,000
write-down of investment securities in the 2008 first quarter, only
$206,000 of capital gain history remained to offset the investment
losses in the 2008 third quarter. Accordingly, only $62,000 of income
tax benefit was recognized on the $1,598,000 of losses from the
write-down and sales of FNMA preferred stock in the 2008 third quarter.

On October 3, 2008, the President signed into law The Emergency
Stabilization Act of 2008 (the "Act"). The Act will allow applicable
financial institutions, as defined, to deduct losses on FNMA preferred
stock owned on September 6, 2008 or sold between January 1, 2008 and
September 7, 2008 against ordinary income for income tax purposes. The
term "applicable financial institutions" did not expressly include
security corporation subsidiaries, such as BSC, the owner of the
Company's FNMA preferred stock. On October 29, 2008, the U.S. Treasury
Department and the Internal Revenue Service issued Revenue Procedure
2008-64 that will enable BSC to treat losses upon the sale of its FNMA
preferred stock as ordinary losses. As a result of issuance of that
Revenue Procedure, the Company will recognize an income tax benefit of
approximately $488,000 as a credit to earnings in the 2008 fourth
quarter.

Merrill Perpetual Preferred Stock

BSC acquired 58,075 shares of Merrill adjustable rate perpetual
preferred stock series 4 on August 28, 2007 at a total cost of
$1,408,000. After the announcement of a significant 2007 third quarter
loss by not only Merrill but other brokerage firms and major banks, the
market price of the Merrill stock declined significantly. The subsequent
reporting of further losses, as well as the collapse of Bear Stearns &
Co., Inc., caused a further decline in the market value of the stock.
Based on these developments, we concluded that an other-than-temporary
impairment in the carrying value of the Merrill stock had occurred and,
accordingly, the carrying value of the stock was written down to its
$932,000 market value at March 31, 2008 by a $476,000 pre-tax charge to
earnings.

On July 28, 2008, Merrill filed a Form 8-K announcing its plans to sell
certain troubled assets at significant losses and that it would report a
net loss in the third quarter, the fifth consecutive quarter of reported
net losses. Merrill also announced that it was enhancing its capital by
a $9.8 billion common stock offering and a pre-tax gain of $4.3 billion
from the sale of its 20% interest in Bloomberg, L.P. Subsequent to the
reporting of these developments, the per share price of Merrill's
perpetual preferred stock dropped to a low of $8.08 per share on
September 11, 2008. The stock rebounded to $10.00 per share at September
30, 2008 as a result of the announcement on September 15, 2008 that
Merrill would be acquired by Bank of America Corporation ("B of A") in
an all stock transaction.

On October 14, 2008, the Office of the Chief Accountant ("OCA") of the
Securities and Exchange Commission (the "SEC") issued a letter, after
consultation with and concurrence of the Financial Accounting Standards
Board ("FASB") staff, giving guidance on how to assess whether declines
in the fair value of perpetual preferred stock constitute
other-than-temporary impairment. The OCA stated it would not object to
impairment tests in conjunction with SEC filings subsequent to October
14, 2008 applied through use of an impairment model (including an
anticipated recovery period) similar to a debt security, provided there
was no evidence of credit deterioration (such as a decline in the cash
flows from holding the investment or a downgrade in the rating of the
security below investment grade) until this subject matter can be
addressed by the FASB.

We believe the Merrill perpetual preferred stock owned by BSC possesses
debt-like characteristics. The stock provides cash flows in the form of
quarterly dividends, contains call features and is rated similar to debt
securities. As of October 16, 2008, the Merrill perpetual preferred
stock had investment grade ratings and there had been no default in the
payments of quarterly dividends. The rate paid continues to be pegged to
the three-month U.S. Libor rate which, of late, has increased.

In our opinion, the key factor to consider in evaluating whether
other-than-temporary impairment in the value of the Merrill perpetual
preferred stock had occurred as of September 30, 2008 was whether
Merrill was financially viable and, therefore, able to continue to pay
quarterly dividends and ultimately call the stock if it wished to do so.
We concluded that Merrill was financially viable based on the following
judgments: (1) it appears Merrill has been more aggressive in reducing
its exposure to high risk assets and de-leveraging its balance sheet
than other brokerage firms and major financial institutions, (2) Merrill
has augmented its capital through a recent common stock offering, (3)
Merrill's core businesses such as global

wealth management and strategic advisory services have continued to
perform well despite difficult market conditions, (4) Merrill will
improve its access to liquidity as a result of being acquired by B of A,
and (5) the announcement that, as part of B of A's $25 billion
participation in the Troubled Asset Relief Program ("TARP") Capital
Purchase Program, Merrill expects to augment its capital by issuing $10
billion of non-voting preferred stock and related warrants to the U.S.
Department of the Treasury.

Based on the above, we concluded that there was no other-than-temporary
impairment in the $932,000 carrying value of the Merrill perpetual
preferred stock owned by BSC at September 30, 2008. The unrealized loss
of $352,000 ($229,000 after taxes) on that stock at that date was
recognized as a reduction of stockholders' equity in connection with
recording securities classified as available for sale at market value.

Preferred Term Securities ("PreTSLs")

PreTSLs represent investment instruments comprised of a pool of trust
preferred securities issued by a number of financial institutions and
insurance companies. An investment instrument can be segregated into
tranches that establish priority rights to cash flows from the
underlying trust preferred securities. At September 30, 2008, the
Company owned two PreTSLs with an aggregate carrying value of $1,268,000
and an aggregate market value of $582,000.

On June 26, 2002, the Company purchased at par $2,000,000 of the
mezzanine tranche of PreTSL VI. The instrument matures on July 3, 2032
and is currently callable at the option of the issuers. Interest is
payable at a floating rate per annum equal to the three-month U.S. Libor
rate plus 180 basis points. At September 30, 2008, the security had
investment grade ratings. As a result of cash payments by pool
participants, the carrying value of this instrument has been reduced to
$279,000 at September 30, 2008; its market value was $178,000 at that
date. The unrealized loss of $101,000 was not considered to be an
other-than-temporary impairment for the following reasons. The tranche
of the investment instrument owned by the Company has first priority to
receipt of future cash payments. A default rate of over 40% would have
to occur before recovery of the Company's investment would be in doubt.
While one issuer in the investment instrument represents over 58% of the
remaining pool, that issuer is "well-capitalized" for regulatory
purposes. While the issuer is currently experiencing losses due to a
high level of problem loans, the recently enacted TARP program could
enable the issuer to obtain capital if it concludes that it needs to do
so. None of the issuers in the investment instrument have defaulted or
deferred payment of interest.

On November 28, 2007, the Company purchased $1,000,000 of the senior
class A-1 tranche of PreTSL XXVIII. The investment instrument matures on
March 22, 2038 and is callable at the option of the issuers on September
24, 2012. Interest is payable quarterly at a floating rate per annum
equal to the three-month U.S. dollar Libor rate plus 0.90%. The
investment instrument was rated AAA at September 30, 2008, but was on
credit watch for a possible downgrade in rating. At September 30, 2008,
the carrying value of this investment was $990,000 and the market value
was $405,000. The unrealized loss of $585,000 was not considered to be
an other-than-temporary impairment for the following reasons. The
investment pool is comprised of 47 financial institution issuers and 11
insurance company issuers, with no issuer representing more than 4% of
the entire pool. Only two issuers representing less than 4% of the
remaining aggregate pool at September 30, 2008 were in default at that
date. The tranche of the investment instrument owned by the Company has
first priority to receipt of future cash payments. Over 40% of the
issuers would have to default before recovery of the Company's
investment could be in doubt.

The aggregate unrealized loss of $686,000 ($446,000 after taxes) on the
above instruments at September 30, 2008 was recognized as a reduction of
stockholders' equity in connection with the recording of securities
classified as available for sale at market value.

Other Corporate Debt Obligations

At September 30, 2008, the aggregate carrying value of trust preferred
securities and other debt obligations owned by the Company was
$3,347,000 and the aggregate market value was $2,730,000. The aggregate
unrealized loss on these securities of $617,000 ($401,000 after taxes)
was not considered to be an other-than-temporary impairment loss because
of the financial soundness of the issuers (B of A, J.P. Morgan Chase &
Co. and two other regional banks). The aggregate unrealized loss was
recognized as a reduction of stockholders' equity at September 30, 2008
in connection with the recording of securities classified as available
for sale at market value.

Auction Rate Municipal Obligations

Auction rate municipal obligations are debt securities issued by
municipal, county and state entities that are generally repaid from
revenue sources such as hospitals, transportation systems, student
education loans and property taxes. The securities are not obligations
of the issuing government entity. The obligations are variable rate
securities with long-term maturities whose interest rates are set
periodically through an auction process. The auction period typically
ranges from 7 days to 35 days. The amount invested in such obligations
was $5,200,000 at September 30, 2008 compared to $5,500,000 at June 30,
2008 and $13,050,000 at December 31, 2007. The reductions resulted from
a combination of payments received from the debt issuers who called
certain obligations and proceeds from sales, all of which were at face
value and, accordingly, resulted in no losses.

The auction rate municipal obligations owned by the Company were rated
"AAA" at the time of acquisition due, in part, to the guarantee of third
party insurers who would have to pay the obligations if the issuers fail
to pay the obligations when they become due. In the 2008 first quarter,
public disclosures indicated that certain third party insurers were
experiencing financial difficulties and, therefore, might have
difficulty meeting their guarantee obligations should issuers fail to
pay their contractual obligations. On a stand-alone basis, that is,
without the guarantee of a third party insurer, all of the auction rate
municipal obligations owned by the Company at September 30, 2008 were
rated "A" or better, except for one issue amounting to $600,000 that did
not have a stand-alone rating.

In February 2008, auctions relating to obligations owned by the Company,
as well as auctions relating to obligations not owned by the Company,
failed to attract a sufficient number of investors. Upon an auction rate
failure, generally the obligations become subject to a penalty imposing
a rise in the interest rate to be paid on the obligation. Auction
failures have continued through the 2008 third quarter, thus creating a
liquidity problem for those investors who were relying on the
obligations to be redeemed at auctions. Continued auction failures can
result in an investment that investors expected to be relatively short
in duration becoming an investment with a long-term duration.

Full collectibility of the municipal obligations owned by the Company
has never been a concern. None of the issuers has defaulted on scheduled
payments and the financial condition of the issuers is considered to be
sound. For these reasons, we do not believe that there has been any
other-than-temporary impairment in the auction rate municipal
obligations owned by the Company at September 30, 2008.

The failed auctions raise the question as to whether the fair value of
the obligations at September 30, 2008 was less than their carrying
value. No active market has developed for the selling of auction rate
municipal obligations. We understand that periodic sales have occurred
at prices in the range of 90% to 95% of face value, although we have not
seen any authoritative published information to support our
understanding. Further, we do not know to what extent investors who sold
their auction rate municipal obligations were compelled to do so for a
reason such as addressing a liquidity concern.

Based on the above information, as well as the ample liquidity of the
Company, we concluded that the fair value of the auction rate municipal
obligations owned by the Company at September 30, 2008 approximated
their face value at that date. We do not foresee any need to sell the
obligations in the future and, accordingly, we will continue to hold the
securities should auctions continue to fail. If a case were to be made
that the fair value of the obligations was 10% less than their face
value (an assumption that we do not believe is valid), the impact would
be to reduce stockholders' equity by $334,000 ($520,000 less related
income taxes), or less than one-tenth of one percent of stockholders'
equity at September 30, 2008. This amount is insignificant in relation
to the Company's consolidated financial statements.

Other Operating Highlights

Loss on Write-downs and Sales of Securities. In addition to the losses
recognized and described in the previous section (Valuation of
Investment Securities), an additional net loss of $2,000 relating to
other equity securities was recognized in the 2008 third quarter.

Other Non-Interest Income. Other non-interest income declined from
$3,257,000 in the 2007 nine month period to $3,075,000 in the 2008 nine
month period due primarily to a $198,000 reduction in mortgage loan
prepayment fees between the two periods.

Non-Interest Expense. Excluding amortization of intangible assets,
non-interest expenses were $827,000 (8.4%) higher in the 2008 third
quarter than in the 2007 third quarter and $1,642,000 (5.7%) higher in
the 2008 nine month period than in the 2007 nine month period. The
increases resulted primarily from higher fees for professional services
($559,000 in the 2008 third quarter and $550,000 in the 2008 nine month
period), higher repossession and auto loan collection costs ($373,000 in
the 2008 nine month period), higher data processing costs and additional
costs associated with a new branch opened in the past year.

Provision for Income Taxes. The effective rate of income taxes for the
Company rose from 38.6% in the 2007 third quarter and nine month period
to 44.8% in the 2008 nine month period and 58.6% in the 2008 third
quarter. The higher rates in 2008 resulted primarily from the tax
treatment of losses on write-downs and sales of investment securities
(see the prior section entitled Valuation of Investment Securities), the
non-deductibility of certain expenses and a $98,000 charge in the 2008
third quarter to adjust deferred income taxes as a result of a
legislative change that will reduce the tax rate payable to the
Commonwealth of Massachusetts on net income earned by financial
institutions. The current rate of 10.5% will drop to 10% for tax years
beginning on or after January 1, 2010, 9.5% for tax years beginning on
or after January 1, 2011 and 9.0% for tax years beginning on or after
January 1, 2012 and thereafter.

Other Financial Condition Highlights

Retail Deposits. Total retail deposits increased $18.3 million (1.4%) in
the 2008 third quarter and $50.1 million (4.0%) in the 2008 nine month
period. The mix of the deposits changed more significantly, especially
in the 2008 third quarter. During that period, money market savings
accounts increased $81.9 million while certificates of deposit decreased
$45.9 million and other deposit categories (demand checking accounts,
NOW accounts and other savings accounts) decreased $17.7 million. For
the 2008 nine month period, money market savings accounts increased
$92.1 million, certificates of deposit decreased $43.2 million and other
deposit categories increased $1.2 million. We believe the shift in
deposits was attributable primarily to the recent turmoil in financial
markets which led a number of depositors to place their funds in more
liquid accounts.

Brokered Deposits. Brokered deposits declined from $67.9 million at
December 31, 2007 to $27.0 million at September 30, 2008 as a result of
payoffs in the 2008 second quarter upon maturities. The deposits were
not rolled over because the rates offered on new brokered deposits were
higher than rates offered on alternative funding sources.

Borrowed Funds. Borrowings from the FHLB increased from $548.0 million
at December 31, 2007 to $652.8 million at June 30, 2008 and $727.2
million at September 30, 2008. The increased borrowings were used
primarily to pay off brokered deposits ($40.9 million) and subordinated
debt ($7.0 million) and to fund part of the loan growth.

Stockholders' Equity. The decline in stockholders' equity from $518.7
million at December 31, 2007 to $505.8 million at June 30, 2008 and
$490.5 million at September 30, 2008 resulted primarily from dividend
payments exceeding earnings. The payment to stockholders of extra
dividends of $0.20 per share each in February and August 2008 amounted
to $23.3 million. The aggregate amount of extra dividends paid since
August 2003 has amounted to over $130 million, or $2.20 per share. The
payout of extra dividends semi-annually has been an effective means to
reduce the Company's capital in a measured way and to treat all
stockholders equally. The decision to pay dividends in the future and
the magnitude of any dividend payments will be considered in light of,
among other things, changing opportunities to deploy capital, economic
conditions and the tax treatment of dividend payments.

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:

Sept. 30, December 31,
2008 2007
------------ ----------------
(Dollars in thousands)
Non-accrual loans:
Mortgage loans:
One-to-four family................................................ $ 385 $ 29
Commercial real estate ........................................... 2,318 -
Commercial loans - Eastern ......................................... 2,091 2,265
Other commercial loan............................................... 65 -
Indirect automobile loans........................................... 122 427
Other consumer loans................................................ - $ 9
----------- ----------
Total non-accrual loans ................................. 4,981 2,730
Repossessed vehicles .................................................. 1,533 1,621
Repossessed equipment ................................................. 447 531
Other real estate owned................................................ 100 517
----------- ----------
Total non-performing assets ............................. $ 7,061 $ 5,399
=========== ==========

Restructured loans - Eastern .......................................... $ 1,516 $ 887
=========== ==========

Allowance for loan losses ............................................. $ 27,232 $ 24,445
=========== ==========

Allowance for loan losses as a percent of total loans ................. 1.32 % 1.29 %
Non-accrual loans as a percent of total loans ......................... 0.24 % 0.14 %
Non-performing assets as a percent of total assets .................... 0.27 % 0.22 %

Loans are placed on non-accrual status either when reasonable doubt
exists as to the full timely collection of interest and principal or
automatically when loans become past due 90 days. At September 30, 2008,
the $2,318,000 of commercial real estate mortgage loans on non-accrual
related to one borrower. The Company has commenced foreclosure
proceedings. While the property has been appraised recently for an
amount in excess of the loan balance, some loss might be incurred from
the ultimate sale of the property.

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. All of the Eastern loans on non-accrual at
September 30, 2008 and December 31, 2007, restructured loans amounting
to $365,000 and the commercial real estate mortgage loan and other
commercial loan on non-accrual at September 30, 2008 were considered to
be impaired loans. Specific reserves on those loans amounted to $856,000
and $515,000 at those respective dates.

Restructured loans represent performing loans for which concessions
(such as extension of repayment terms or reductions of interest rates to
below market rates) are granted due to a borrower's financial condition.
All of the restructured loans at September 30, 2008 and December 31,
2007 were loans originated by Eastern. The increase in restructured
loans resulted primarily from extensions of the term over which the
loans are to be paid.

The reduction in repossessed vehicles resulted from auction sales. The
inventory of repossessed vehicles could rise if auto loan borrowers
experience difficulties in meeting their payments on a timely basis. It
should also be noted that sales of repossessed vehicles at auctions are
resulting in higher per unit losses. Due to the economy and high fuel
prices, the market for repossessed luxury vehicles and vehicles that are
fuel-inefficient is weak. Accordingly, auto loan charge-offs could
continue to be high over the remainder of 2008.

For further information about loan delinquencies and charge-offs, see
the subsection "Provision for Credit Losses" included herein.

The unallocated portion of the allowance for loan losses was $3,586,000,
or 13.2%, of the total allowance for loan losses at September 30, 2008
compared to $3,987,000, or 16.3%, of the total allowance for loan losses
at December 31, 2007. It is available to offset any shortfall that may
result if future charge-offs in any segment of the Company's loan
portfolio exceed current estimates.

Asset/Liability Management

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

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

At September 30, 2008, interest-earning assets maturing or repricing
within one year amounted to $1.003 billion and interest-bearing
liabilities maturing or repricing within one year amounted to $1.251
billion, resulting in a cumulative one year negative gap position of
$248 million, or 9.6% of total assets. At December 31, 2007, the Company
had a negative one year cumulative gap position of $209 million, or 8.6%
of total assets. The change in the cumulative one year gap position from
the end of 2007 resulted primarily from reduction in the total of
short-term investments and an increase in borrowings maturing within one
year.

Liquidity and Capital Resources

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

Based on its monitoring of deposit trends and its current pricing
strategy for deposits, management believes the Company will retain a
large portion of its existing deposit base. Growth during the remainder
of 2008 will depend on several factors, including economic trends, the
interest rate environment and competitor pricing.

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, 2008 amounted to $727.2
million and the Company had the capacity to increase that amount to
$861.4 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
September 30, 2008, such assets amounted to $144.3 million, or 5.6% of
total assets.

At September 30, 2008, Brookline Bank exceeded all regulatory capital
requirements. The Bank's Tier I capital was $416.9 million, or 16.6% of
adjusted assets. The minimum required Tier I capital ratio is 4.00%.

Recent Accounting Pronouncements

Statement of Financial Accounting Standards No. 159 ("SFAS 159"), "Fair
Value Option for Financial Assets and Financial Liabilities". In
February 2007, the FASB issued SFAS 159 which generally permits the
measurement of selected eligible financial instruments, including
investment securities, at fair value as of specified election dates and
to report unrealized gains or losses on those instruments in earnings at
each subsequent reporting date. Generally, the fair value option may be
applied on an instrument by instrument basis but, once applied, the
election is irrevocable and is applied to the entire instrument. The
provisions of SFAS 159 were effective as of January 1, 2008. However,
the Company has not elected the fair value option under SFAS 159.

Statement of Financial Accounting Standards No. 141 (Revised 2007),
"Business Combinations" ("SFAS 141R") and Statement of Financial
Accounting Standards No. 160, "Noncontrolling Interests in Consolidated
Financial Statements, an Amendment of ARB No. 51 ("SFAS 160"). In
December 2007, the FASB issued SFAS 141R and SFAS 160. These statements
require significant changes in the accounting and reporting for business
acquisitions and the reporting of noncontrolling interests in
subsidiaries. Among many changes under SFAS 141R, an acquirer will
record 100% of all assets and liabilities at fair value for partial
acquisitions, contingent consideration will be recognized at fair value
at the acquisition date with changes possibly recognized in earnings,
and acquisition related costs will be expensed rather than capitalized.
SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary. Key changes under the standard
are that noncontrolling interests in a subsidiary will be reported as
part of equity, losses allocated to a noncontrolling interest can result
in a deficit balance, and changes in ownership interests that do not
result in a change of control are accounted for as equity transactions
and, upon a loss of control, gain or loss is recognized and the
remaining interest is remeasured at fair value on the date control is
lost. SFAS 141R applies prospectively to business combinations for which
the acquisition is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The effective
date for applying SFAS 160 is also the first annual reporting period
beginning on or after December 15, 2008. Adoption of these statements
will affect the Company's accounting for any business acquisitions
occurring after the effective date and the reporting of any
noncontrolling interests in subsidiaries existing on or after the
effective date.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

For a discussion of the Company's management of market risk exposure and
quantitative information about market risk, see pages 15 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, 2007.

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

On February 21, 2007, Carrie E. Mosca filed a putative class action
complaint against Brookline Bank in the Superior Court for the
Commonwealth of Massachusetts (the "Action"). Ms. Mosca defaulted on a
loan obligation on an automobile that she co-owned. She alleges that the
form of notice of sale of collateral that the Bank sent to her after she
and the co-owner became delinquent on the loan obligation did not
contain information required to be provided to a consumer under the
Massachusetts Uniform Commercial Code. The Action purports to be brought
on behalf of a class of individuals who purchased motor vehicles from
dealers located in Massachusetts and to whom the Bank sent the same form
of notice of sale of collateral during the four year period prior to the
filing of the Action. The Action seeks statutory damages, an order
restraining the Bank from future use of the form of notice sent to Ms.
Mosca, an order barring the Bank from recovering any deficiency from
other individuals to whom it sent the same form of notice, attorneys'
fees, litigation expenses and costs. The Bank has answered, denying
liability and has opposed Plaintiff's motion to certify a class. The
Court denied Plaintiff's motion for class certification in an order
dated July 18, 2008. Plaintiff has moved for summary judgment seeking an
award of statutory damages in the amount of $2,928 to her individually.
The Bank has opposed that motion and oral argument is scheduled to be
heard on November 18, 2008.

Item 1A. Risk Factors

There have been no material changes from the risk factors presented in
the Company's Form 10-K for the year ended December 31, 2007 filed on
February 28, 2008.

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

a) Not applicable.

b) Not applicable.

c) The following table presents a summary of the Company's share
repurchases during the quarter ended September 30, 2008.

Total
Number of
Shares Maximum
Purchased Number of
as Part of Shares that
Average Publicly May Yet
Total Price Announced be Purchased
Number of Paid Programs Under the
Shares Per (1) (2) Programs
Period Purchased Share (3) (1) (2) (3)
------ --------- ------- ---------- ------------
July 1 through September 30, 2008 ..... - - 2,195,590 4,804,410

(1) On April 19, 2007, the Board of Directors approved a program to
repurchase 2,500,000 shares of the Company's common stock. Prior to
July 1, 2008, 2,195,590 shares authorized under this program had been
repurchased. At September 30, 2008, 304,410 shares authorized under
this program remained available for repurchase.

(2) On July 19, 2007, the Board of Directors approved another program
to repurchase an additional 2,000,000 shares of the Company's common
stock. At September 30, 2008, all of the 2,000,000 shares authorized
under this program remained available for repurchase.

(3) On January 17, 2008, the Board of Directors approved another
program to repurchase an additional 2,500,000 shares of the Company's
common stock. At September 30, 2008, all of the 2,500,000 shares
authorized under this program remained available for repurchase.

The Board of Directors has delegated to the discretion of the Company's
senior management the authority to determine the timing of the
repurchases and the prices at which the repurchases will be made.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

None

Item 5. Other Information

David J. Pallin, who is 69 years old and the senior officer responsible
for indirect auto lending, announced on October 16, 2008 his retirement
from the Company effective December 31, 2008. Mark R. Hennessy, who has
been an officer in the Company's indirect auto lending business since
February 2003, will assume management responsibilities for that business
segment. Mr. Pallin will be available for consultation until the date of
his retirement.

Item 6. Exhibits

Exhibits

Exhibit 11 Statement Regarding Computation of Per Share Earnings

Exhibit 31.1 Certification of Chief Executive Officer

Exhibit 31.2 Certification of Chief Financial Officer

Exhibit 32.1 Section 1350 Certification of Chief Executive Officer

Exhibit 32.2 Section 1350 Certification of Chief Financial Officer

SIGNATURES

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

BROOKLINE BANCORP, INC.

Date: November 3, 2008 By: /s/ Richard P. Chapman, Jr.
----------------------------------
Richard P. Chapman, Jr.
President and Chief Executive Officer

Date: November 3, 2008 By: /s/ Paul R. Bechet
----------------------------------
Paul R. Bechet
Senior Vice President, Treasurer and
Chief Financial Officer