10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, for the Fiscal Year Ended December 31, 2006, or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, for the transition period from    N/A     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 of organization)	(I.R.S. Employer Identification No.)

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

(617) 730-3500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, par value of $0.01 per share	Nasdaq Global Market

Securities registered pursuant to Section 12 (g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1934.

YES x   NO o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934.  

YES o   NO x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirement for the past 90 days.      

YES x   NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.     x

Indicate by check mark whether the registrant is a large accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer”.    Large accelerated filer  x   Accelerated filer  o   Non-accelerated filer  o

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

YES o   NO x

The number of shares of common stock held by nonaffiliates of the registrant as of February 23, 2007 was 60,935,492 for an aggregate market value of $789.1 million. This excludes 629,081 shares held by Brookline Bank Employee Stock Ownership Plan and Trust.

At February 23, 2007, the number of shares of common stock, par value $0.01 per share, issued and outstanding were 62,970,184 and 61,564,573, respectively.

DOCUMENTS INCORPORATED BY REFERENCE

1.  Sections of the Annual Report to Stockholders for the year ended December 31, 2006 (Part I and Part II)

2.  Proxy Statement for the Annual Meeting of Stockholders dated March 15, 2007 (Part III)

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-K

Index

Part I		Page
Item 1.	Business	1-20
Item 1A.	Risk Factors	20
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties	21
Item 3.	Legal Proceedings	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
Part II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.	Selected Consolidated Financial Data	21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 8.	Financial Statements and Supplementary Data	22
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	22
Item 9A.	Controls and Procedures	22
Item 9B.	Other Information	22
Part III
Item 10.	Directors and Executive Officers of the Registrant	23
Item 11.	Executive Compensation	23
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	23
Item 13.	Certain Relationships and Related Transactions	23
Item 14.	Principal Accounting Fees and Services	23
Part IV
Item 15.	Exhibits, Financial Statement Schedules	23
Signatures		25

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that may be identified by the use of such words as “may”, “could”, “should”, “will”, “would”, “believe”, “expect”, “anticipate”, “estimate”, “intend”, “plan”, “assume” or similar expressions.  Examples of forward-looking statements include, but are not limited to, estimates with respect to the Company’s financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from those estimates. 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.

PART I

Item 1.      Business

General

Brookline Bancorp, Inc. (the “Company”) was organized in November 1997 for the purpose of acquiring all of the capital stock of Brookline Savings Bank (“Brookline” or the “Bank”) upon completion of the reorganization of Brookline from a mutual savings bank into a mutual holding company structure. In January 2003, Brookline Savings Bank changed its name to Brookline Bank. Brookline was established as a savings bank in 1871. Brookline Bancorp, MHC (the “MHC”), a mutual holding company, owned 15,420,350 of the Company’s shares of outstanding common stock through July 9, 2002.

In June 2000, the Company commenced operations of Lighthouse Bank (“Lighthouse”) as New England’s first-chartered internet-only bank. On July 17, 2001, Lighthouse was merged into Brookline.

The Company, the MHC, Brookline and Lighthouse converted from state to federal charters on July 16, 2001. As a result, each of these entities became subject to regulation by the Office of Thrift Supervision (“OTS”).

On July 9, 2002, the Boards of Directors of the MHC, the Company and Brookline completed a Plan of Conversion and Reorganization. As of that date, the 15,420,350 shares owned by the MHC were retired and the Company sold 33,723,750 shares of common stock for $10.00 per share. After taking into consideration related expenses of $4.5 million, net proceeds from the stock offering amounted to $332.7 million. An additional 24,888,478 shares were issued to existing stockholders based on an exchange rate of 2.186964 new shares of common stock for each existing share, resulting in 58,612,228 total new shares outstanding. Cash was paid in lieu of fractional shares.

Upon completion of the Plan of Conversion and Reorganization, (a) Brookline Bancorp, Inc. became a Delaware corporation and the holding company parent of the Bank, (b) the MHC ceased to exist and (c) the net assets of the MHC, $8.5 million, were transferred into Brookline.

On January 7, 2005, the Company completed the acquisition of Mystic Financial, Inc. (“Mystic”) for approximately $69.1 million. That amount consisted of $27.7 million in cash (including approximately $3.9 million for the cancellation of Mystic stock options), issuance of 2,516,525 shares of the Company’s common stock, $1.6 million in income tax benefits related to cancellation of the Mystic stock options, $4.7 million of direct acquisition costs, net of related tax benefits, and a credit of $1.1 million for 70,312 shares of Company common stock obtained and placed in treasury resulting from termination of Mystic’s employee stock option plan and Company common stock owned by Mystic.

Mystic was the parent of Medford Co-operative Bank, a bank headquartered in Medford, Massachusetts with seven banking offices serving customers primarily in Middlesex County in Massachusetts. The acquisition of Mystic has provided expanded commercial and retail banking opportunities in that market and enabled the Company to deploy some of its excess capital. For additional information about the acquisition, see note 2 to the consolidated financial statements in the Company’s Annual Report to Stockholders for the year ended December 31, 2006 which is incorporated herein by reference.

On April 13, 2006, the Company increased its ownership interest in Eastern Funding LLC (“Eastern”) from approximately 28% to 87% through a payment of $16.6 million in cash, including transaction costs. The acquisition added $115 million to the Company’s assets, $108 million of which were loans. Eastern specializes primarily in the financing of coin-operated laundry, dry cleaning and convenience store equipment and businesses in the greater metropolitan New York area and selected other locations in the Northeast. The acquisition has enabled the Company to originate high yielding loans to small

1

business entities. For additional information about the acquisition, see note 2 to the consolidated financial statements in the Company’s Annual Report to Stockholders for the year ended December 31, 2006 which is incorporated herein by reference.

Market Area and Credit Risk Concentration

As of December 31, 2006, Brookline operated sixteen full-service banking offices in Brookline, Medford and adjacent communities in Middlesex County and Norfolk County in Massachusetts.

Brookline’s deposits are gathered from the general public primarily in the communities in which its banking offices are located. Brookline’s lending activities are concentrated primarily in the greater Boston metropolitan area and eastern Massachusetts. The greater Boston metropolitan area benefits from the presence of numerous institutions of higher learning, medical care and research centers and the corporate headquarters of several significant mutual fund investment companies. Eastern Massachusetts also has many high technology companies employing personnel with specialized skills. It should be noted, however, that Massachusetts has been losing population over the past few years. These factors affect the demand for residential homes, multi-family apartments, office buildings, shopping centers, industrial warehouses and other commercial properties.

Brookline’s urban and suburban market area is characterized by a large number of apartment buildings, condominiums and office buildings. As a result, multi-family and commercial real estate mortgage lending has been a significant part of Brookline’s activities for many years. These types of loans typically generate higher yields, but also involve greater credit risk than one-to four-family mortgage loans. Many of Brookline’s borrowers have more than one multi-family or commercial real estate loan outstanding with Brookline. Moreover, the loans are concentrated in the market area described in the preceding paragraph.

In the first quarter of 2003, the Company commenced originating indirect automobile loans. In general, the success of lending in this business segment depends on many factors, the more significant of which include the policies established for loan underwriting, the monitoring of portfolio performance, and the effect of economic conditions on consumers and the automobile industry. For regulatory purposes, the Company’s loan portfolio is not classified as “subprime lending”. Most of the Company’s loans are originated through automobile dealerships in Massachusetts, Connecticut and New Hampshire.

In 2006, Brookline hired two senior officers with extensive experience in originating commercial loans for working capital and other business-related purposes. Brookline is concentrating such lending to companies located primarily in Massachusetts.  As with commercial real estate mortgage loans, commercial business loans involve greater credit risk.

As previously mentioned, Eastern originates loans to finance equipment and businesses primarily in market areas outside of New England. The loans earn higher yields of interest because the borrowers are typically small businesses with limited capital. For this reason, however, the loans involve greater credit risk.

Economic Conditions and Governmental Policies

The earnings and business of the Company are affected by external influences such as general economic conditions and the policies of governmental authorities, including the Federal Reserve Board. The Federal Reserve Board regulates the supply of money and bank credit to influence general economic conditions throughout the United States. The instruments of monetary policy employed by the Federal Reserve Board affect interest rates earned on investment securities and loans and interest rates paid on deposits and borrowed funds.

Repayment of multi-family and commercial real estate loans made by the Company generally is dependent on sufficient income from the properties to cover operating expenses and debt service. Repayment of commercial loans and Eastern loans generally is dependent on the demand for the borrowers’ products or services and the ability of the borrower to compete and operate on a profitable basis. Repayment of indirect automobile loans generally is dependent on the financial well-being of the borrowers and their capacity to service their debt levels. The asset quality of the Company’s loan portfolio, therefore, is greatly affected by the economy.

The Company net interest margin is greatly influenced by interest rates established by the Federal Open Market Committee of the Federal Reserve System. In the past two years, the combination of their rate setting actions and trends in economic indicators such as the rate of inflation, the rate of economic growth, unemployment and the housing market caused the yield curve to migrate from an upward slope to an inverted slope. Improvement in net interest margin will continue to be difficult to achieve until the slope of the yield curve starts to move upward. If interest rates rise, the ability of borrowers to service debt could be adversely affected and the value of properties and assets pledged as collateral for loans could diminish.

2

Competition

The Company faces significant competition both in making loans and in attracting deposits. The Boston metropolitan area has a high density of financial institutions, many of which are branches of significantly larger institutions which have greater financial resources than the Company, and all of which are competitors of the Company to varying degrees. The Company’s competition for loans comes principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies, credit unions, insurance companies and other financial service companies. Its most direct competition for deposits has historically come from commercial banks, savings banks, savings and loan associations and credit unions. The Company faces additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies.

Competition for loans and deposits has intensified greatly over the past two years. As a result, rates paid for deposits increased more rapidly than the increases in rates set by the Federal Reserve Board for borrowings between banks. Rates offered on new loans, however, did not increase at the same pace needed to sustain historic levels of profit margin.

Investment Securities

The investment policy of the Company is reviewed and approved by the Board of Directors on an annual basis. The current policy states that investments should generally be of high quality and credit risk should be limited through diversification. Investment decisions are made based on the safety of the investment, expected earnings in relation to investment risk, the liquidity needs of the Company, the interest rate risk profile of the Company, and economic and market trends.

Generally, debt securities must be rated “A” or better by at least one nationally-recognized rating agency at the time of purchase. Debt securities rated “BBB” at the time of purchase are allowed provided the security has a scheduled maturity of no more than two years and the purchase is authorized by the chief executive officer of the Company. The carrying value of all debt securities in the Company’s investment portfolio that are not rated or rated “BBB” or lower are not to exceed 10.0% of stockholders’ equity, excluding unrealized gains on securities available for sale (“core capital”). At December 31, 2006, $524,000 of debt securities were rated “BBB” or lower, an amount equal to 0.1% of core capital.

U.S. Government-Sponsored Enterprises

The Company invests in debt securities issued by U.S. Government-sponsored enterprises. Such investments include debt securities issued by the Federal Home Loan Banks, Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Farm Credit Bank. Except for Ginnie Mae securities, none of those obligations is backed by the full faith and credit of the U.S. Government. The aggregate carrying value of such debt securities is not to exceed 60% of the Company’s stockholders’ equity. The aggregate carrying value of debt securities issued by the Federal Home Loan Banks is not to exceed 30% of the Company’s stockholder’s equity and the aggregate carrying value of debt securities issued by any other U.S. Government-sponsored enterprise is not to exceed 15% of the Company’s stockholders’ equity. Also, the aggregate carrying value of all debt securities and discount notes issued by U.S. Government-sponsored enterprise is not to exceed 75% of the Company’s stockholders’ equity and the amount invested in discount notes issued by U.S. Government-sponsored enterprise is not to be more than 20% of the Company’s stockholders’ equity. Discount notes are debt instruments that mature in 90 days or less.

In 2006, most of the Company’s investment purchases were debt securities issued by U.S. Government-sponsored enterprises with maturities primarily in the eighteen month to two year range. The Company concentrated on acquiring debt securities with short maturities to reduce interest rate risk during a period of uncertainty as to the direction of interest rates. The aggregate carrying value of debt securities issued by U.S. Government-sponsored enterprises was $213.4 million, or 36.6% of the Company’s stockholders’ equity at December 31, 2006. At that date, the Company was in compliance with all of its investment policy limits.

Corporate Obligations

Regarding investments in corporate obligations, no more than $5.0 million of any debt security should mature beyond one year at the time of purchase, no investment of more than $3.0 million in any debt security can be made without the prior approval of the chief executive officer of the Company and no investment of over $8.0 million can be made without the prior approval of the Executive Committee of the Board of Directors. To maintain diversification in the portfolio, the aggregate carrying value of debt securities issued by one company (excluding short-term investments) must not exceed $15.0 million and the aggregate carrying value of debt securities issued by companies considered to be in the same industry must not exceed $75.0 million. The latter limit is allowed provided the aggregate value of investments rated less than “AA” does not exceed $50.0 million. At December 31, 2006, the total of corporate obligations was $6.5 million and the total amount of debt securities issued by corporate entities in the same industry was $2.0 million.

3

Mortgage Securities

The Company also invests in mortgage related securities, including collateralized mortgage obligations (“CMOs”). These securities are considered attractive investments because they (a) generate positive yields with minimal administrative expense, (b) impose minimal credit risk as a result of the guarantees usually provided, (c) can be utilized as collateral for borrowings, (d) generate cash flows useful for liquidity management and (e) are “qualified thrift investments” for purposes of the thrift lender test that the Company is obliged to meet for regulatory purposes.

Mortgage related securities are created by the pooling of mortgages and the issuance of a security with an interest rate that is less than the average interest rate on the underlying mortgages. Mortgage related securities purchased by the Company generally are comprised of a pool of single-family mortgages. The issuers of such securities are generally U.S. Government-sponsored enterprises such as Fannie Mae, Freddie Mac and Ginnie Mae who pool and resell participation interests in the form of securities to investors and guarantee the payment of principal and interest to the investors. Occasionally, the Company purchases mortgage related securities that are not issued by U.S. Government-sponsored enterprises. Such purchases are usually made for community reinvestment (“CRA”) purposes. Mortgage related securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements.

Investments in mortgage related securities generally do not entail significant credit risk. Such investments, however, are susceptible to significant interest rate and cash flow risks when actual cash flows from the investments differ from cash flows estimated at the time of purchase. Additionally, the market value of such securities can be affected adversely by market changes in interest rates. Prepayments that are faster than anticipated may shorten the life of a security and result in the accelerated expensing of any premiums paid, thereby reducing the net yield earned on the security. Although prepayments of underlying mortgages depend on many factors, the difference between the interest rates on the underlying mortgages and prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of declining interest rates, refinancing generally increases and accelerates the prepayment of underlying mortgages and the related security. Such an occurrence can also create reinvestment risk because of the unavailability of other investments with a comparable rate of return in relation to the nature and maturity of the alternative investment. Conversely, in a rising interest rate environment, prepayments may decline, thereby extending the estimated life of the security and depriving the Company of the ability to reinvest cash flows at the higher market rates of interest.

CMOs are a type of debt security issued by a special purpose entity that aggregates pools of mortgages and mortgage related securities and creates different classes of CMO securities with varying maturities and amortization schedules as well as residual interest with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into “tranches”, or classes, whereby tranches have descending priorities with respect to the distribution of principal and interest repayment of the underlying mortgages and mortgage related securities, as opposed to pass through mortgage-backed securities where cash flows are distributed pro rata to all security holders. In contrast to mortgage-backed securities from which cash flow is received pro rata by all security holders (and hence, prepayment risk is shared), the cash flow from the mortgages or mortgage related securities underlying CMOs is paid in accordance with predetermined priority to investors holding various tranches of such securities. A particular tranche of a CMO may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches.

An analysis is performed of the characteristics of a mortgage related security under consideration prior to its purchase. The purchase of any mortgage related security with high price sensitivity (price decline of more than 10% under an adverse parallel change in interest rates) must be approved by the chief executive officer of the Company.

Generally, the Company has purchased the first tranche of CMOs so as to keep the expected maturities of its investments relatively short and to reduce the exposure to prepayment and reinvestment risks. The first tranche of CMOs are commonly classified as PAC-1-1 securities. No purchase of any mortgage related security in excess of $5.0 million or involving payment of a premium of 2.0% or more or having an expected average life of more than three years can be made without the approval of the chief executive officer of the Company. Purchases of all mortgage related securities not classified as PAC-1-1 securities or issued by other than U.S. Government-sponsored enterprises also require approval of the chief executive officer. It is the Company’s policy that aggregate unamortized premiums on all mortgage related securities in the Company’s portfolio must not exceed $4.0 million. At December 31, 2006, aggregate unamortized premiums on all mortgage related securities in the portfolio amounted to $236,000.

The Company’s investment in mortgage securities increased from $49 million at December 31, 2005 to $91 million at December 31, 2006. The securities acquired in 2006 were purchased mostly at a discount and were acquired because of their higher yield in relation to other investment possibilities within the Company’s risk parameters.

4

Municipal Obligations

The total of municipal obligations owned by the Company at December 31, 2006 and 2005 remained unchanged at $8.5 million. Of the total, $7.8 million will mature within three years.  Obligations owned at December 31, 2006 were issued by municipalities located throughout the United States and were rated “AAA” at that date, except for obligations with a carrying value of $1.4 million that were rated “AA”. At December 31, 2006, the Company also owned $12.7 million of auction rate municipal bonds. These bonds are variable rate securities with long-term maturities whose interest rates are set periodically through an auction process. The auction rate period for the bonds outstanding at December 31, 2006 ranged from 28 days to 35 days.

Marketable Equity Securities

At December 31, 2006, the Company owned marketable equity securities with a market value of $2.7 million, including net unrealized gains of $140,000. Most of the marketable equity securities include stocks of banks and utility companies. The Company’s policy limits the aggregate cost of marketable equity securities issued by one company to no more than $10.0 million without prior approval of the Executive Committee of the Board of Directors. The aggregate cost of marketable equity securities issued by companies considered to be in the same industry must not exceed $30.0 million and the aggregate cost of the entire marketable equity securities portfolio must not exceed $50.0 million. The Company purchases marketable equity securities as long-term investments that can provide the opportunity for capital appreciation and dividend income that is taxed on a more favorable basis than operating income. There can be no assurance that investment in marketable equity securities will achieve appreciation in value and, therefore, such investments involve higher risk.

The following table sets forth the composition of the Company’s debt and equity securities portfolios at the dates indicated:

	At December 31,
	2006				2005				2004
	Amount		Percent of total		Amount		Percent of total		Amount		Percent of total
	(Dollars in thousands)
Debt securities:
U.S. Government-sponsored enterprises	$	213,371	58.61	%	$	293,516	73.67	%	$	169,165	60.59	%
Municipal obligations	8,507		2.34		8,504		2.14		2,697		0.97
Auction rate municipal obligations	12,650		3.47		12,750		3.20		—		—
Corporate obligations	6,510		1.79		7,520		1.89		8,749		3.13
Other obligations	500		0.14		600		0.15		1,000		0.36
Collateralized mortgage obligations issued by U.S. Government-sponsored enterprises	51,971		14.28		210		0.05		45,935		16.45
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	39,295		10.79		48,673		12.22		24,735		8.86
Total debt securities	332,804		91.42		371,773		93.32		252,281		90.36
Auction rate preferred stock	—		—		—		—		5,000		1.79
Other marketable equity securities	2,675		0.73		3,543		0.89		4,460		1.60
Restricted equity securities	28,567		7.85		23,081		5.79		17,444		6.25
Total investment securities	$	364,046	100.00	%	$	398,397	100.00	%	$	279,185	100.00	%
Debt and equity securities available for sale	$	335,246	92.09	%	$	374,906	94.11	%	$	260,852	93.43	%
Debt securities held to maturity	233		0.06		410		0.10		889		0.32
Restricted equity securities	28,567		7.85		23,081		5.79		17,444		6.25
Total investment securities	$	364,046	100.00	%	$	398,397	100.00	%	$	279,185	100.00	%

5

The following table sets forth certain information regarding the amortized cost and market value of the Company’s investment securities at the dates indicated:

	At December 31,
	2006					2005					2004
	Amortized			Market		Amortized			Market		Amortized		Market
	cost			value		cost			value		cost		value
	(Dollars in thousands)
Securities available for sale:
Debt securities:
U.S. Government-sponsored enterprises	$	213,528		$	213,371	$	295,232		$	293,516	$	169,888	$	169,165
Municipal obligations	8,660			8,507		8,671			8,504		2,706		2,697
Auction rate municipal obligations	12,650			12,650		12,750			12,750		—		—
Corporate obligations	6,467			6,510		7,478			7,520		8,584		8,749
Other obligations	500			500		500			500		500		500
Collateralized mortgage obligations issued by U.S. Government-sponsored enterprises	52,126			51,971		211			210		46,016		45,935
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	40,209			39,062		49,681			48,363		24,346		24,346
Total debt securities	334,140			332,571		374,523			371,363		252,040		251,392
Auction rate preferred stock	—			—		—			—		5,000		5,000
Marketable equity securities	2,535			2,675		2,881			3,543		2,940		4,460
Total securities available for sale	336,675			335,246		377,404			374,906		259,980		260,852
Net unrealized gains (losses) on securities available for sale	(1,429		)	—		(2,498		)	—		872		—
Total securities availablefor sale, net	$	335,246		$	335,246	$	374,906		$	374,906	$	260,852	$	260,852
Securities held to maturity:
Other obligations	$	—		$	—	$	100		$	100	500		$	500
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	233			242		310			323		389		414
Total securities held to maturity	$	233		$	242	$	410		$	423	$	889	$	914
Restricted equity securities:
Federal Home Loan Bank of Boston stock	$	28,193				$	22,707				$	17,070
Massachusetts Savings Bank Life Insurance Company stock	253					253					253
Other stock	121					121					121
Total restricted equity securities	$	28,567				$	23,081				$	17,444

6

The table below sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Company’s securities portfolio at the date indicated.

	At December 31, 2006
	One year or less				After one year through five years				After five years through ten years				After ten years				Total
			Weighted				Weighted				Weighted				Weighted				Weighted
	Carrying		average		Carrying		average		Carrying		average		Carrying		average		Carrying		average
	value		yield		value		yield		value		yield		value		yield		value		yield
	(Dollars in thousands)
Securities available for sale:
Debt securities:
U.S. Government-sponsored enterprises	$	120,877	4.47	%	$	92,494	5.13	%	$	—	—	%	$	—	—	%	$	213,371	4.76	%
Municipal obligations (1)	4,085		3.72		3,681		4.04		741		5.53		—		—		8,507		4.02
Auction rate municipal obligations (2)	—		—		—		—		—		—		12,650		5.50		12,650		5.50
Corporate obligations	495		4.04		—		—		—		—		6,015		6.69		6,510		6.49
Other obligations	—		—		500		5.05		—		—		—		—		500		5.05
Collateralized mortgage obligations	—		—		51,971		5.24		—		—		—		—		51,971		5.24
Mortgage-backed securities	—		—		13,425		4.42		13,655		4.04		11,982		4.81		39,062		4.41
Total debt securities	125,457		4.44		162,071		5.08		14,396		4.12		30,647		5.46		332,571		4.83
Other marketable equity securities (1)																	2,675		4.55
Total securities available for sale																	335,246		4.83
Securities held to maturity:
Mortgage-backed securities	1		7.96		37		9.11		—		—		195		6.04		233		6.54
Restricted equity securities:
Federal Home Loan Bank of Boston stock																	28,193		5.80
Massachusetts Savings Bank Life Insurance Company stock (1)																	253		4.17
Other stock																	121		—
Total restricted equity securities (1).																	28,567		5.76
Total securities	$	125,458	4.44	%	$	162,108	5.08	%	$	14,396	4.12	%	$	30,842	5.47	%	$	364,046	4.91	%

(1)  The yields have been calculated on a tax equivalent basis.

(2)  These obligations are variable rate securities whose interest rates are set periodically through an auction process. Auctions occurred on these obligations within 35 days after December 31, 2006.

7

Loans

The following table sets forth the comparison of the Company’s loan portfolio in dollar amounts and in percentages by type of loan at the dates indicated.

	At December 31,
	2006					2005					2004					2003					2002
				Percent					Percent					Percent					Percent					Percent
	Amount			of total		Amount			of total		Amount			of total		Amount			of total		Amount			of total
	(Dollars in thousands)
Mortgage loans:
One-to-four family	$	286,623		15.38	%	$	287,450		16.77	%	$	135,995		10.32	%	$	122,524		11.00	%	$	134,445		15.94	%
Multi-family	331,106			17.77		379,767			22.15		334,884			25.42		339,998			30.53		324,755			38.50
Commercial real estate	373,744			20.05		377,462			22.02		297,014			22.55		312,647			28.08		281,952			33.43
Construction and development	37,589			2.02		36,035			2.10		35,237			2.67		24,813			2.23		16,691			1.98
Home equity	36,432			1.96		42,924			2.50		14,066			1.07		12,082			1.09		10,802			1.28
Second	16,646			0.89		22,978			1.34		53,499			4.06		43,650			3.92		36,323			4.31
Total mortgage loans	1,082,140			58.07		1,146,616			66.88		870,695			66.09		855,714			76.85		804,968			95.44
Indirect automobile loans	540,094			28.98		459,234			26.79		368,962			28.01		211,206			18.97		—			—
Commercial loans - Eastern	127,275			6.83		—			—		—			—		—			—		—			—
Other commercial loans	110,780			5.94		105,384			6.15		75,349			5.72		44,207			3.97		35,096			4.16
Other consumer loans	3,322			0.18		3,119			0.18		2,406			0.18		2,401			0.21		3,409			0.40
Total gross loans, excluding money market loan participations	1,863,611			100.00	%	1,714,353			100.00	%	1,317,412			100.00	%	1,113,528			100.00	%	843,473			100.00	%
Less:
Unadvanced funds on loans	(85,879		)			(88,659		)			(57,205		)			(46,777		)			(39,684		)
Deferred loan origination costs (fees):
Indirect automobile loans	13,175					11,150					9,732					6,254					—
Commercial loans - Eastern	991					—					—					—					—
Other consumer loans	164					(89		)			(302		)			(265		)			(364		)
Total loans, excluding money market loan participations	1,792,062					1,636,755					1,269,637					1,072,740					803,425
Money market loan participations	—					—					—					2,000					4,000
Total loans, net	$	1,792,062				$	1,636,755				$	1,269,637				$	1,074,740				$	807,425

The Company’s loan portfolio consists primarily of first mortgage loans secured by multi-family, commercial and one-to-four family residential real estate properties located in the Company’s primary lending area, indirect automobile loans and loans made by Eastern to finance equipment used by small businesses. The Company also provides financing for construction and development projects, commercial lines of credit primarily to business entities and condominium associations, home equity and second mortgage loans, and other consumer loans.

The Company relies on community and business contacts as well as referrals from customers, attorneys and other professionals to generate loans. In addition, existing borrowers are an important source of business since many of them have more than one loan outstanding with the Company. The Company’s ability to originate loans depends on the strength of the economy, trends in interest rates, customer demands and competition.

Many of the Company’s borrowers have done business with the Company for years and have more than one loan outstanding. It is the Company’s current policy that the aggregate amount of loans outstanding to any one borrower or related entities may not exceed $25.0 million. At December 31, 2006, the Company’s largest borrower had a commercial loan outstanding of $20.0 million collateralized by marketable securities. Including this borrower, there were 33 borrowers each with aggregate loans outstanding of $5.0 million or greater at December 31, 2006. The cumulative total of those loans was $318.6 million, or 24% of loans outstanding (excluding indirect automobile loans). Most of this cumulative amount is comprised of multi-family and commercial real estate mortgage loans.

The Company has written underwriting policies to control the inherent risks in loan origination. The policies address approval limits, loan-to-value ratios, appraisal requirements, debt service coverage ratios, loan concentration limits and other matters relevant to loan underwriting.

8

Multi-Family and Commercial Real Estate Mortgage Loans

A number of factors are considered in originating multi-family and commercial real estate mortgage loans. The qualifications and financial condition of the borrower (including credit history), profitability and expertise, as well as the value and condition of the underlying property, are evaluated. When evaluating the qualifications of the borrower, the Company considers the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with the Company and other financial institutions. Factors considered in evaluating the underlying property include the net operating income of the mortgaged premises before debt service and depreciation, the debt service coverage ratio (the ratio of net operating income to debt service) and the ratio of the loan amount to the appraised value.

Frequently, multi-family and commercial real estate mortgage loans are made for five to ten year terms, with an amortization period of twenty to twenty-five years. Many of the loans originated in the past few years have been priced at inception on a fixed-rate basis generally for periods ranging from two to seven years. To reduce risk in a rising interest rate environment, occasionally the Company has partially funded fixed-rate loans by borrowing funds from the FHLB on a fixed-rate basis for periods that approximate the fixed-rate terms of the loans. Generally, a yield maintenance fee and other fees are collected when a fixed-rate loan is paid off prior to its maturity.

Multi-family mortgage loans declined from $380 million at December 31, 2005 to $331 million at December 31, 2006. Commercial real estate mortgage loans declined from $377 million to $374 million at those respective dates. Competition for multi-family mortgage loans has been intensifying and, as a result, certain lenders have reduced the rates at which they are willing to make such loans. The Company has opted to seek loan growth in other segments that yield higher rates of interest and, accordingly, its financing of multi-family properties has diminished.

One-to-Four Family Mortgage Loans

Three commissioned loan originators on the staff of the Company generate residential mortgage loan business. The Company offers both fixed-rate and adjustable-rate mortgage loans secured by one-to-four family residences. Generally, fixed-rate residential mortgage loans with maturities beyond ten years are not maintained in the Company’s loan portfolio.

Construction and Development Loans

At December 31, 2006, construction and development loans amounted to $37.6 million, $6.2 million of which had not been advanced as of that date. The $31.4 million is comprised of $7.4 million pertaining to construction of multi-family properties, $8.4 million pertaining to construction of commercial properties, $12.8 million pertaining to construction of one-to-four family residential homes and $2.8 million pertaining to land loans. Different criteria are applied in underwriting construction loans for which the primary source of repayment is the sale of the property than in underwriting construction loans for which the primary source of repayment is the stabilized cash flow from the completed project. For those loans where the primary source of repayment is from resale of the property, in addition to the normal credit analysis performed for other loans, the Company also analyzes project costs, the attractiveness of the property in relation to the market in which it is located and demand within the market area. For those construction loans where the source of repayment is the stabilized cash flow from the completed project, the Company analyzes not only project costs but also how long it might take to achieve satisfactory occupancy and the reasonableness of projected rental rates in relation to market rental rates.

Construction and development financing is generally considered to involve a higher degree of risk than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of construction costs, the estimated time to sell or rent the completed property at an adequate price or rate of occupancy, and market conditions. If the estimates and projections prove to be inaccurate, the Company may be confronted with a project which, upon completion, has a value that is insufficient to assure full loan repayment.

Commercial Loans - Eastern

The Eastern loan portfolio amounted to $127 million at December 31, 2006, an increase of $19 million from the level which existed in April 2006 when the Company increased its ownership interest in Eastern. The portfolio is comprised primarily of loans to finance coin-operated laundry, dry cleaning and convenience store equipment and businesses. The borrowers are small businesses located primarily in the metropolitan New York area, although the customer base extends to locations throughout the United States. Typically, the loans are priced at a fixed rate of interest and require monthly payments over their three to seven year life. In some instances, the life of a loan can extend to ten years.

Eastern focuses on making loans to customers with business experience. An important part of Eastern’s loan originations comes from existing customers as they expand their operations and acquire additional stores. The size of loan that Eastern is willing to make is determined by an analysis of cash flow and other characteristics pertaining to the store and equipment to

9

be financed. Eastern has developed a base of data of the revenue and profitability of stores it has financed. It has also accumulated data on the prices at which stores have sold. Eastern’s loan policy contains limits on the multiples of revenues and earnings that can be applied to derive an estimate of the value of a store to be financed.

The yields earned on Eastern’s loans are higher than those earned on commercial loans made by Brookline because they involve a higher degree of credit risk. Eastern’s customers are typically small businesses who operate with limited financial resources and who are more at risk when the economy weakens or unforeseen adverse events arise. Because of these characteristics, personal guarantees of borrowers are usually obtained along with liens on available assets.

Other Commercial Loans

Other commercial loans, which amounted to $111 million at December 31, 2006, compared to $105 million at December 31, 2005, included loans to condominium associations of $61.5 million and $56.7 million, respectively. Typically, such loans are for the purpose of funding capital improvements, are made for five to ten year terms and are secured by a general assignment of the revenue of the condominium association. Among the factors considered in the underwriting of such loans are the level of owner occupancy, the financial condition and history of the condominium association, the attractiveness of the property in relation to the market in which it is located and the reasonableness of estimates of the cost of capital improvements to be made. Depending on loan size, funds are advanced as capital improvements are made and, in more complex situations, after completion of engineering inspections.

The Company also provides commercial banking services to small businesses in its market area. Product offerings include lines of credit for working capital as well as financing for capital expenditures and owner-occupied mortgage financing. Interest rates on these loans typically are tied to the prime rate and adjust when changes occur in that benchmark.

This type of commercial lending commenced with the acquisition of Mystic in January 2005. In 2006, the Company hired two senior officers with extensive experience in commercial lending. The Company expects to grow its commercial lending business in a measured way by focusing on credit fundamentals and service to established business concerns. At December 31, 2006, commercial business loans amounted to $48.7 million, including $11.3 million in standby letters of credit. This part of the portfolio included a $20.0 million loan fully collateralized by marketable securities that was mentioned on the second preceding page.

Indirect Automobile Loans

The Company commenced originating indirect automobile loans in the first quarter of 2003. Such loans amounted to $540 million at December 31, 2006 compared to $459 million at December 31, 2005. Indirect automobile loans are loans for automobiles (both new and used) and light duty trucks primarily to individuals, but also to corporations and other organizations.

Indirect automobile loans are originated through dealerships and assigned to the Company. The senior vice president responsible for indirect automobile lending must approve the application of any dealer with whom the Company does business. The Company does business with over 200 dealerships located primarily in Massachusetts, Connecticut and New Hampshire. Dealer relationships are reviewed monthly for application quality, the ratio of loans approved to applications submitted and loan performance.

Loan applications are generated by approved dealers and data are entered into an application processing system. Two types of scorecard models are used in the underwriting process - credit bureau scorecard models and a custom scorecard model. Credit bureau scorecard models are based on data accumulated by nationally recognized credit bureaus. The models are risk assessment tools that analyze an individual’s credit history and assign a numeric credit score. The models meet the requirements of the Equal Credit Opportunity Act. The custom scorecard model is a judgmentally derived scoring model that includes features selected for analysis by the Company. It does not contain any factors prohibited by the Equal Credit Opportunity Act. Management generates reports periodically to track and monitor scorecards in use and the consistency of application processing.

The indirect automobile loan policy limits the aggregate number of loans with credit scores of less than 660 to 15% of loans outstanding. At December 31, 2006, loans with credit scores below 660 were approximately 11% of loans outstanding. The average credit score of loans in the portfolio at that date was 732.

The application processing system statistically grades each application according to score ranges. Depending on the data received, an application is either approved automatically or submitted to a credit underwriter for review. Credit underwriters may override system-designated approvals. Loans approved by the underwriters must meet criteria guidelines established in the Company’s loan policy. Credit profile measurements such as debt to income ratios, payment to income ratios and loan to value ratios are utilized in the underwriting process and to monitor the performance of loans falling within specified ratio

10

ranges. Regarding loan to value ratios, the Company considers automobile loans to be essentially unsecured credits that are partially collateralized. When borrowers cease to make required payments, repossession and sale of the vehicle financed usually results in insufficient funds to fully pay the remaining loan balance.

Indirect automobile loans are assigned a particular tier based on the credit score determined by the credit bureau. The tier is used for pricing purposes only so as to assure consistency in loan pricing. Tier rates can be modified if certain conditions exist as outlined in the Company’s loan policy. The rate paid by a borrower usually differs with the “buy rate” earned by the Company. A significant part of the difference between the two rates is retained by the dealer in accordance with terms agreed to between the dealer and the Company. The difference is commonly referred to as the “spread”.  Most of the spread is paid after the end of the month in which the loan is made and is comprised of the agreed-upon rate differential multiplied by the expected average balance of the loan over its scheduled maturity. If a loan is repaid in entirety within 120 days of the loan origination date, the dealer must pay a proportionate part of the spread to the Company. If a loan is repaid after ninety days, the dealer is not obliged to repay any part of the spread amount previously received. Spread payments to dealers are amortized as a reduction of interest received from borrowers over the life of the related loans. When loans are prepaid, any remaining unamortized balance is charged to expense at that time.

Various reports are generated to monitor receipt of required loan documents, adherence to loan policy parameters, dealer performance, loan delinquencies and loan charge-offs. Summary reports are submitted to the chief executive officer, the risk management officer and the board of directors on a monthly basis.

Loan Maturities and Repricing

The following table shows the contractual maturity and repricing dates of the Company’s gross loans, net of unadvanced funds, at December 31, 2006. The table does not include prepayments or scheduled principal amortization.

	At December 31, 2006
	Real estate mortgage loans
	One-to- four family		Multi- family and commercial real estate		Construction and development		Home  equity and second mortgage		Commercial  loans -  Eastern		Other commercial  loans		Indirect automobile loans		Other loans		Total loans
	(In thousands)
Amounts due:
Within one year	$	26,491	$	201,466	$	30,292	$	43,628	$	3,531	$	35,486	$	2,539	$	3,190	$	346,623
After one year:
More than one year to three years	99,065		205,855		1,150		2,275		25,311		9,047		116,971		29		459,703
More than three years to five years	96,137		127,452		—		998		55,250		11,905		301,618		96		593,456
More than five years to ten years	35,980		121,530		—		2,178		43,464		12,404		118,966		—		334,522
More than ten years	28,776		15,535		—		—		—		—		—		—		44,311
Total due after one year	259,958		470,372		1,150		5,451		124,025		33,356		537,555		125		1,431,992
Total amount due	$	286,449	$	671,838	$	31,442	$	49,079	$	127,556	$	68,842	$	540,094	$	3,315	1,778,615
Add (deduct):
Deferred loan origination costs:
Indirect automobile loans																	13,175
Commercial loans - Eastern																	991
Other loans																	164
Acquisition fair value adjustments																	(883		)
Net loans																	$	1,792,062

11

The following table sets forth at December 31, 2006 the dollar amount of gross loans, net of unadvanced funds, contractually due or scheduled to reprice after one year and whether such loans have fixed interest rates or adjustable interest rates.

	Due after one year
	Fixed		Adjustable		Total
	(In thousands)
Mortgage loans:
One-to-four family	$	46,918	$	213,040	$	259,958
Multi-family	76,186		127,568		203,754
Commercial real estate	93,653		172,965		266,618
Construction and development	1,150		—		1,150
Home equity and second mortgage	3,363		2,088		5,451
Total mortgage loans	221,270		515,661		736,931
Commercial loans - Eastern	124,025		—		124,025
Other commercial loans	13,915		19,441		33,356
Indirect automobile loans	537,555		—		537,555
Other consumer loans	125		—		125
Total loans	$	896,890	$	535,102	$	1,431,992

Non-Performing Assets and Allowance for Loan Losses

For information about the Company’s non-performing assets and allowance for loan losses, see pages 9 through 13 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2006 Annual Report to Stockholders which is incorporated herein by reference.

Retail Deposits

Historically, retail deposits have been the Company’s primary source of funds. The Company offers a variety of deposit accounts with a range of interest rates and terms. The Company’s retail deposit accounts consist of non-interest-bearing checking accounts and interest-bearing NOW accounts, savings accounts and money market savings accounts (referred to in the aggregate as “transaction deposit accounts”) and certificate of deposit accounts.  The Company offers individual retirement accounts (“IRAs”) and other qualified plan accounts.

The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and the relative attractiveness of competing deposit and investment alternatives. Brookline’s deposits are obtained predominantly from customers in the communities in which its banking offices are located. Deposits are also gathered via the internet. The Company relies primarily on competitive pricing of its deposit products, customer service and long-standing relationships with customers to attract and retain deposits. Market interest rates and rates offered by competing financial institutions significantly affect the Company’s ability to attract and retain deposits.

The following table presents the retail deposit activity of the Company for the years indicated.

	Year ended December 31,
	2006		2005		2004
	(Dollars in thousands)
Net retail deposits	$	6,164	$	371,186	$	82,328
Interest credited on retail deposit accounts	35,735		23,163		11,709
Total increase in retail deposit accounts	$	41,899	$	394,349	$	94,037

In 2004, transaction deposit accounts increased $29.5 million, or 6.9%, and certificates of deposit increased $64.5 million, or 25.5%. The increases were due to the opening of new branches in the fall of 2004 and 2003, marketing initiatives and a rise in interest rates in the second half of 2004 which prompted some customers to place funds in higher yielding deposit accounts.

In 2005, transaction deposit accounts increased $65.1 million, or 14.3%, and certificates of deposit increased $329.2 million, or 103.8%. Of the total increase in deposits, $332 million resulted from the acquisition of Mystic. The rise in interest rates during 2005 added to the increase in certificate of deposit accounts.

In 2006, transaction deposit accounts decreased $53.2 million, or 10.2%, and certificates of deposit increased $95.1 million, or 14.7%. The change to an inverted yield environment during 2006 resulted in much higher rates being offered on deposit

12

accounts with shorter maturities. As a result, many customers transferred funds out of transaction deposit accounts to certificate of deposit accounts.

The following table sets forth the distribution of the Company’s average retail and brokered deposit accounts for the years indicated and the weighted average interest rates on each category of deposits presented. Averages for the years presented utilize average daily balances.

	Year ended December 31, 2006						Year ended December 31, 2005
			Percent						Percent
			of total						of total
			average		Weighted				average		Weighted
	Average		retail		average		Average		retail		average
	balance		deposits		rate		balance		deposits		rate
	(Dollars in thousands)
NOW accounts	$	89,008	7.62	%	0.25	%	$	96,853	8.53	%	0.22	%
Savings accounts	112,774		9.66		1.60		147,922		13.02		1.36
Money market savings accounts	219,533		18.80		2.43		268,026		23.59		1.62
Non-interest-bearing demand checking accounts	61,869		5.30		—		67,081		5.90		—
Total transaction deposit accounts	483,184		41.38		1.52		579,882		51.04		1.13
Retail certificates of deposit by original maturity:
Six months or less	102,573		8.79		3.97		89,427		7.87		2.68
Over six months through 12 months	433,928		37.16		4.45		264,447		23.28		2.90
Over 12 months through 24 months	89,728		7.68		3.38		134,708		11.86		2.73
Over 24 months	58,274		4.99		3.46		67,630		5.95		4.24
Total retail certificates of deposit	684,503		58.62		4.15		556,212		48.96		2.99
Total average retail deposits	$	1,167,687	100.00	%	3.07	%	$	1,136,094	100.00	%	2.04	%
Total average brokered certificates of deposit	$	49,598			5.37	%	$	—			—	%

	Year ended December 31, 2004
			Percent
			of total
			average		Weighted
	Average		retail		average
	balance		deposits		rate
	(Dollars in thousands)
NOW accounts	$	62,543	8.67	%	0.14	%
Savings accounts	69,364		9.62		1.69
Money market savings accounts	279,590		38.76		1.18
Non-interest-bearing demand checking accounts	35,789		4.96		—
Total transaction deposit accounts	447,286		62.01		1.02
Retail certificates of deposit by original maturity:
Six months or less	57,721		8.00		1.52
Over six months through 12 months	78,397		10.87		1.97
Over 12 months through 24 months	88,572		12.28		3.00
Over 24 months	49,344		6.84		4.22
Total retail certificates of deposit	274,034		37.99		2.61
Total average retail deposits	$	721,320	100.00	%	1.62	%
Total average brokered certificates of deposit	$	—			—	%

13

At December 31, 2006, the Company had outstanding $260.1 million in retail certificates of deposit of $100,000 or more, maturing as follows:

	Amount		Weighted average rate
Maturity Period	(Dollars in thousands)
Three months or less	$	75,548	4.71	%
Over three months through six months	84,042		4.99
Over six months through 12 months	74,861		5.08
Over 12 months	25,693		4.74
	$	260,144	4.91

Borrowed Funds

The Company utilizes advances from the FHLB to fund part of its loan growth and in connection with its management of the interest rate sensitivity of its assets and liabilities. The advances are secured by a blanket security agreement which requires the Bank to maintain as collateral certain qualifying assets, principally mortgage loans and securities in an aggregate amount at least equal to outstanding advances. The maximum amount that the FHLB will advance to member institutions, including the Company, fluctuates from time to time in accordance with the policies of the FHLB. At December 31, 2006, the Company had $464 million in outstanding advances from the FHLB and had the capacity to increase that amount to $695 million.

The following table sets forth certain information regarding borrowed funds for the dates indicated:

	Year ended December 31,
	2006			2005			2004
	(Dollars in thousands)
Advances from the FHLB:
Average balance outstanding	$	491,946		$	413,555		$	280,739
Maximum amount outstanding at any month end during the year	534,223			430,142			320,171
Balance outstanding at end of year	463,806			411,507			320,171
Weighted average interest rate during the year	4.70		%	3.67		%	3.35		%
Weighted average interest rate at end of year	4.79		%	4.16		%	3.23		%

Return on Equity and Assets

Return on equity and assets for the years presented is as follows:

	Year ended December 31,
	2006		2005		2004
Return on assets (net income divided by average total assets)	0.89	%	1.01	%	1.10	%
Return on equity (net income divided by average stockholders’ equity)	3.53	%	3.61	%	2.99	%
Dividend payout ratio (dividends declared per share divided by net income per share)	217.65	%	200.00	%	238.71	%
Equity to assets ratio (average stockholders’ equity divided by average total assets)	25.25	%	27.89	%	36.86	%

Subsidiary Activities

Brookline is a wholly-owned subsidiary of the Company. Information as to when it was established and its activities is included elsewhere in Part I of this document.

Eastern was founded by Michael J. Fanger in 1997. Information about Eastern’s activities is included elsewhere in Part I of this document. In 1999, the Company acquired a 28% ownership interest in Eastern. On April 13, 2006, the Company (through Brookline) completed a merger agreement increasing its ownership interest in Eastern to 86.7%. Mr. Fanger continues to serve as chief executive officer of Eastern and he, along with a family member and two executive officers of Eastern, own the 13.3% minority interest position. For more information about Eastern, see note 2 to the consolidated

14

financial statements appearing on pages F-16 through F-18 in the Company’s 2006 Annual Report to Stockholders which is incorporated herein by reference.

Brookline Securities Corp. (“BSC”) is a wholly-owned subsidiary of the Company and BBS Investment Corporation (“BBS”) is a wholly-owned subsidiary of Brookline. These companies were established as Massachusetts security corporations for the purpose of buying, selling and holding investment securities on their own behalf and not as a broker. The income earned on their investment securities is subject to a significantly lower rate of state tax than that assessed on income earned on investment securities owned by the Company and Brookline. At December 31, 2006, BSC and BBS had total assets of $103 million and $319 million, respectively, of which $103 million and $317 million, respectively, were in investment securities and short-term investments.

160 Associates, Inc. (“Associates”), a wholly-owned subsidiary of Brookline established as a Massachusetts corporation primarily for the purpose of acquiring and holding stock in a subsidiary engaged in business that qualifies as a real estate investment trust, was liquidated on December 31, 2003. Brookline Preferred Capital Corporation (“BPCC”), a 99.9% owned subsidiary of Associates established as a real estate investment trust (“REIT”) engaged in the acquisition and holding of securities and mortgage loans, was also liquidated on December 31, 2003. These companies were liquidated because of a change in the Massachusetts law in 2003 that eliminated the favorable state tax treatment previously accorded to REITs.

Mystic Financial Capital Trust I (“MFCI”) and Mystic Financial Capital Trust II (“MFCII”) were formed for the purpose of issuing trust preferred securities and investing the proceeds from the sale of the securities in subordinated debentures issued by Mystic. The Company assumed the obligations related to the debentures when it acquired Mystic. Interest paid by the Company on the subordinated debentures equals the dividends paid by MFCI and MFCII to the holders of the trust preferred securities.

Proceeds from the trust preferred securities issued by MFCI were invested in $5.0 million of floating rate subordinated debentures that mature in 2032, but are callable at the option of the Company on April 22, 2007. These debentures represent the sole asset of MFCI. The interest rate on the debentures changes semi-annually to 6-month LIBOR plus 3.70%.

Proceeds from the trust preferred securities issued by MFCII were invested in $7.0 million of floating rate subordinated debentures that mature in 2033, but are callable at the option of the Company on April 15, 2008. These debentures represent the sole asset of MFCII. The interest rate on the debentures changes quarterly to 3-month LIBOR plus 3.25%.

Personnel

As of December 31, 2006, the Company had 208 full-time employees and 40 part-time employees. The employees are not represented by a collective bargaining unit and the Company considers its relationship with its employees to be good.

Supervision and Regulation

General

The Bank is regulated, examined and supervised by the Office of Thrift Supervision (“OTS”) and, to a lesser extent, the Federal Deposit Insurance Corporation (“FDIC”). This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. The OTS examines the Bank and prepares reports for the consideration of its board of directors on any operating deficiencies.

Any change in these laws or regulations, whether by the FDIC, the OTS or Congress, could have a material adverse impact on the Company and the Bank and their operations.

Federal Banking Regulation

Business Activities.  A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the OTS. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets. The Bank also may establish subsidiaries that may engage in activities not otherwise permissible for the Bank, including real estate investment and securities brokerage.

Capital Requirements.  OTS regulations require federal savings banks to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for savings associations receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.

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The risk-based capital standard for federal savings banks requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS capital regulation based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

At December 31, 2006, the Bank’s capital exceeded all applicable requirements.

Loans-to-One Borrower.  A federal savings bank generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, but generally does not include real estate. As of December 31, 2006, the Bank was in compliance with the loans-to-one borrower limitations.

Qualified Thrift Lender Test. As a federal savings bank, the Bank is subject to a qualified thrift lender, or “QTL,” test.  Under the QTL test, the Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12 month period.  “Portfolio assets” generally means total assets of a federal savings bank, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the bank’s business.

“Qualified thrift investments” includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of portfolio assets.  “Qualified thrift investments” also include 100% of a federal savings bank’s credit card loans, education loans and small business loans.

A federal savings bank that fails the qualified thrift lender test must either convert to a commercial bank charter or operate under specified restrictions. At December 31, 2006, the Bank maintained 69.0% of its portfolio assets in qualified thrift investments.

Capital Distributions.  OTS regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the capital account. A federal savings bank must file an application for approval of a capital distribution if:

·the total capital distributions for the applicable calendar year exceed the sum of the bank’s net income for that year to date plus the bank’s retained net income for the preceding two years;

·the bank would not be at least adequately capitalized following the distribution;

·the distribution would violate any applicable statute, regulation, agreement or OTS-imposed condition; or

·the bank is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, every federal savings bank that is a subsidiary of a holding company must still file a notice with the OTS at least 30 days before the board of directors declares a dividend or approves a capital distribution.

The OTS may disapprove a notice or application if:

·the bank would be undercapitalized following the distribution;

·the proposed capital distribution raises safety and soundness concerns; or

·the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

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Liquidity.  A federal savings bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.

Community Reinvestment Act and Fair Lending Laws. All federal savings banks have a responsibility under the Community Reinvestment Act and related regulations of the OTS to help meet the credit needs of their communities, including low and moderate-income neighborhoods. In conducting bank examinations, the OTS is required to assess a bank’s record of compliance with the Community Reinvestment Act.  In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. The Bank received an outstanding Community Reinvestment Act rating in its most recent examination conducted by the OTS.

Transactions with Related Parties.  A federal savings bank’s authority to engage in transactions with its “affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act (the “FRA”) and implementing regulations. The term “affiliates” for these purposes generally means any company that controls or is under common control with an institution. The Company and its non-savings bank subsidiaries are affiliates of the Bank. In general, transactions with affiliates must be on terms that are as favorable to the bank as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the bank’s unimpaired capital and surplus. In addition, OTS regulations prohibit a bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary.

The Bank’s authority to extend credit to its directors, executive officers and 10% or higher shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s unimpaired capital and surplus. In addition, extensions of credit to insiders must be approved by the Bank’s board of directors.

Enforcement.  The OTS has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties” which includes officers, directors and employees of the institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day.

Standards for Safety and Soundness.  The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement safety and soundness standards required under federal law. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.

Prompt Corrective Action Regulations. The OTS is required and authorized to take supervisory actions against undercapitalized savings institutions. For this purpose, a federal savings bank is placed in one of the following five categories based on the bank’s capital:

·well-capitalized (at least 5% leverage capital, 6% tier 1 risk-based capital and 10% total risk-based capital);

·adequately capitalized (at least 4% leverage capital, 4% tier 1 risk-based capital and 8% total risk-based capital);

·undercapitalized (less than 8% total risk-based capital, 4% tier 1 risk-based capital or 3% leverage capital);

·significantly undercapitalized (less than 6% total risk-based capital, 3% tier 1 risk-based capital or 3% leverage capital); and

·critically undercapitalized (less than 2% tangible capital).

Generally, the banking regulator is required to appoint a receiver or conservator for a bank that is “critically undercapitalized”. The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a bank receives notice that it is “undercapitalized”, “significantly undercapitalized” or “critically undercapitalized”.

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In addition, numerous mandatory supervisory actions become immediately applicable to the bank, including, but not limited to, restrictions on growth, investment activities, capital distributions and affiliate transactions.  The OTS may also take any one of a number of discretionary supervisory actions against undercapitalized banks, including the issuance of a capital directive and the replacement of senior executive officers and directors.

At December 31, 2006, the Bank met the criteria for being considered “well-capitalized.”

Insurance of Deposit Accounts.  Deposit accounts in the Bank are insured by the Deposit Insurance Fund of the FDIC, generally up to a maximum of $100,000 per separately insured depositor and $250,000 for self-directed retirement accounts. The Bank’s deposits therefore are subject to FDIC deposit insurance assessments.

On February 15, 2006, federal legislation to reform federal deposit insurance was enacted. This new legislation required, among other things, that the FDIC adopt regulations increasing the maximum amount of federal deposit insurance coverage per separately insured depositor beginning in 2010 (with a cost of living adjustment to become effective in five years) and modifying the deposit fund’s reserve ratio for a range between 1.15% and 1.50% of estimated insured deposits.

On November 2, 2006, the FDIC adopted final regulations establishing a risk-based assessment system that will enable the FDIC to more closely tie each financial institution’s premiums to the risk it poses to the deposit insurance fund.  Under the new risk-based assessment system, which becomes effective in the beginning of 2007, the FDIC will evaluate the risk of each financial institution based on three primary sources of information: (1) its supervisory rating, (2) its financial ratios and (3) its long-term debt issuer rating, if the institution has one. The new rates for nearly all of the financial institution industry will vary between five and seven cents for every $100 of domestic deposits. At the same time, the FDIC also adopted final regulations designating the reserve ratio for the deposit insurance fund during 2007 at 1.25% of estimated insured deposits.

Prohibitions Against Tying Arrangements.  Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the bank or its affiliates or not obtain services of a competitor of the bank.

Federal Home Loan Bank System

The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Boston, the Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank in an amount at least equal to 4.5% of its borrowings from the Federal Home Loan Bank. As of December 31, 2006, the Bank was in compliance with this requirement.

Federal Reserve System

The Federal Reserve Board regulations require federal savings banks to maintain non-interest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At December 31, 2006, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS.

Holding Company Regulation

The Company is a Delaware-chartered savings and loan holding company subject to regulation and supervision by the OTS. The OTS has enforcement authority over the Company and its non-savings bank subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a risk to the Bank.

The Company became a savings and loan holding company after May 4, 1999 and, therefore, its activities are limited to the activities permissible for financial holding companies or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance, as well as activities incidental to or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and certain additional activities authorized by OTS regulations.

Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring control of another savings institution or holding company thereof, without prior written approval of the OTS.  It also prohibits the acquisition or retention of, with specified exceptions, more than 5% of the equity securities of a company engaged in activities that are not closely related to banking or financial in nature or acquiring or retaining control of an

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institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources, future prospects of the savings institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.

The USA PATRIOT Act

On October 26, 2001, the USA PATRIOT Act was enacted. The Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The Act also requires the federal banking regulators to take into consideration the effectiveness of controls designed to combat money-laundering activities in determining whether to approve a merger or other acquisition application of an FDIC-insured institution. As such, if the Company or the Bank were to engage in a merger or other acquisition, the effectiveness of its anti-money-laundering controls would be considered as part of the application process. The Bank has established policies, procedures and systems to comply with the applicable requirements of the law.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 is a federal law that requires the Company’s chief executive officer and chief financial officer to certify to the accuracy of periodic reports filed by the Company with the Securities and Exchange Commission, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement. The legislation accelerates the time frame for disclosures by public companies like the Company, as they must immediately disclose any material changes in their financial condition or operations. Directors and executive officers must also provide information for most changes in ownership in a company’s securities within two business days of the change. Under the Act, Audit Committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, the Act prohibits any officer or director of the Company or any other person acting under their direction from taking action to fraudulently influence, coerce, manipulate or mislead any independent accountant engaged in the audit of the Company’s financial statements for the purpose of rendering the financial statements materially misleading.

The Act also requires inclusion of an internal control report and assessment by management in the annual report to shareholders. The Act requires the Company’s independent registered public accounting firm that issues the audit report to attest to and report on management’s assessment of the Company’s internal controls.

Taxation

Federal Taxation

General. The Company and the Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company or the Bank.

The Company and the Bank have not had their federal income tax returns audited by the Internal Revenue Service during the past five years.

Method of Accounting. For federal income tax purposes, the Company reports its income and expenses on the accrual method of accounting and uses a fiscal year ending December 31 for filing its consolidated federal income tax returns.

Taxable Distributions and Recapture. Bad debt reserves created prior to November 1, 1988 are subject to recapture into taxable income should the Bank make certain non-dividend distributions or cease to maintain a bank charter. At December 31, 2006, the Bank’s total federal pre-1988 reserve was $1.8 million. This reserve reflects the cumulative effects of federal tax deductions by the Bank for which no federal income tax provision has been made.

Minimum Tax. The Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”). The AMT is payable to the extent such AMT exceeds regular income tax. In general, net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Company has not been subject to the alternative minimum tax and has no such amounts available as credits for carryover.

Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2006, the Company had $2.5 million of net operating loss carry forward for federal income tax purposes resulting from the Mystic acquisition.

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Corporate Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations.

State and Local Taxation

The Company and the Bank are subject to an annual excise tax imposed by the Commonwealth of Massachusetts equal to 10.5% of their taxable income. Combined reporting is not permitted under Massachusetts statutes.  Massachusetts taxable income is defined as federal taxable income subject to certain modifications. The Company believes these modifications allow for a deduction for 95% of dividend payments received from subsidiaries and allow deductions from certain expenses allocated to federally tax exempt obligations. The investment subsidiaries of the Company and the Bank are not subject to the corporate excise tax, but instead are taxed on their gross income at a rate of 1.32%.

Eastern is a limited liability company and, accordingly, it does not pay federal or state income taxes. Instead, the owners of Eastern must include in their taxable income their proportionate share of Eastern’s taxable earnings. Such earnings are apportioned to the states in which the income was derived. Brookline reports its share of Eastern’s taxable income in tax returns that are filed with New York State, the City of New York and five other states. Tax rates range from 7.00% to 10.84% on the taxable income apportioned to the five states and the City of New York.

Securities and Exchange Commission Availability of Filings on Company Web Site

Under the Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current reports must be filed with the SEC. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The Company electronically files the following reports with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly Report) and Form 8-K (Report of Unscheduled Material Events). The Company may file additional forms.

The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at www.sec.gov, in which all forms filed electronically may be accessed. Additionally, the Company’s annual report on form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC and additional shareholder information are available free of charge on the Company’s website: www.brooklinebank.com. The Company’s Code of Ethics is also available on the Company’s website.

Item 1A.  Risk Factors

There are several significant risk factors that affect the financial performance of financial institutions in general and the Company in particular. This Report, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s Annual Report to Stockholders, which is incorporated herein by reference, include comments relating to those factors.

Presented below is a summary of risk factors that are especially significant to the Company. While these factors apply to most financial institutions, the commentary which follows addresses only how those factors are significant to the Company.

Changes in the Interest Rate Policies of the Federal Open Market Committee of the Federal Reserve System. Interest rate changes made by the Federal Reserve since June 2004 caused the yield curve to migrate from an upward slope to an inverted slope. An inverted yield curve diminishes the profitability of the Bank. Improvement in net interest margin will continue to be difficult to achieve until the slope of the yield curve starts to move upward. Rising interest rates could have an adverse effect on the ability of borrowers to repay loans and on the value of properties and assets pledged as loan collateral.

Changes in the Real Estate Market. The real estate market in the area where the Company conducts most of its business is experiencing a slow down in activity and a reduction in the prices at which real estate is bought and sold.  These trends could affect the volume of business the Company can achieve in the future and the value of underlying collateral related to the Company’s mortgage loan portfolio. A substantial part of the Company’s assets are supported by real estate.

Changes in the Local Economy. Most of the Company’s activity is concentrated in eastern Massachusetts. Massachusetts has lost population in the past few years. Continuation of that trend could affect the ability of the Company to grow in the future. Further economic slow down could affect the ability of both business and consumer borrowers to repay their loans. Besides a significant mortgage loan portfolio, the Company had $540 million of indirect automobile loans at December 31, 2006.

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Competition. Currently, pricing for loans and deposits by many competitors is very aggressive and at rates that result in lower than normal profit margins. While the Company has more than ample capital to compete with most financial institutions, continuation of existing pricing trends will have an adverse effect on the Company’s profitability.

Legislative and Regulatory Changes. Compliance with the Sarbanes-Oxley Act of 2002 that relates to, among other things, assessment and monitoring of the Company’s internal controls over financial reporting, has resulted in substantial added costs for the Company. The requirements of this Act are especially burdensome and frustrating to an entity such as the Company that has been subjected to comprehensive regulatory examination and supervision for many years. The Company has also devoted important resources to meet new regulatory requirements in areas such as domestic security and customer privacy. Continuation of the frequency and complexity of legislative and regulatory changes will place further pressure on the Company’s overall profitability.

Successful Execution of Growth Initiatives. As described elsewhere in this Report, in 2006 the Company expanded its ownership of Eastern and hired two senior commercial loan officers. It is expected that both of these initiatives will provide profitable growth opportunities. On the other hand, expansion of activities in areas where the Company’s prior history is limited involves greater risks.

Item 1B.  Unresolved Staff Comments

None

Item 2.    Properties

At December 31, 2006, the Bank conducted its business from its main office located in Brookline, fifteen other banking offices located in Brookline, Medford and adjacent communities in Middlesex, Norfolk and Suffolk counties in Massachusetts, an operations center of the Bank in Brookline and an office in Newton, Massachusetts used to conduct the Bank’s indirect automobile lending business. In addition to its main office, the Bank owns three of its banking offices and leases all of its other locations. It also has three remote ATM locations, one of which is leased. Eastern conducts its business from leased premises in New York, New York. Refer to note 13 of the Notes to Consolidated Financial Statements in the Company’s 2006 Annual Report to Stockholders, which is incorporated herein by reference, for information regarding the Company’s lease commitments at December 31, 2006.

Item 3.    Legal Proceedings

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which are believed by management to be immaterial to the financial condition and results of operations of the Company.

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

None

PART II

Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a)The common stock of the Company is traded on the Nasdaq Global Market. The approximate number of holders of common stock as of December 31, 2006, as well as a table setting forth cash dividends paid on common stock and the high and low closing prices of the common stock for each of the quarters in the years ended December 31, 2006 and 2005, appears on the inside of the back cover page of the Company’s 2006 Annual Report to Stockholders which is incorporated herein by reference.

(b)Not applicable.

(c)No repurchases of the Company’s common stock were made in the fourth quarter of 2006.

Item 6.    Selected Consolidated Financial Data

Selected Consolidated Financial Data of the Company appears on the back of the cover page and page 1 of the Company’s 2006 Annual Report to Stockholders which is incorporated herein by reference.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations appears on pages 1 through 17 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2006 Annual Report to Stockholders which is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and Qualitative Disclosures About Market Risk appears on pages 13 through 16 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2006 Annual Report to Stockholders which is incorporated herein by reference.

Item 8.    Financial Statements and Supplementary Data

The following financial statements and supplementary data appear on the pages indicated of the Company’s 2006 Annual Report to Stockholders which is incorporated herein by reference:

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2006 and 2005

Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Comprehensive Income for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004

Notes to Consolidated Financial Statements

The supplementary data required by this Item relating to selected quarterly financial data is provided in note 18 of the notes to consolidated financial statements included in Item 8 of Part II of this Report.

Item 9.    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Company’s 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 Chief Financial Officer considered that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure 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 periods 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.

Management’s Report on Internal Control Over Financial Reporting as of December 31, 2006 appears on page F-1 of the Company’s 2006 Annual Report to Stockholders which is incorporated herein by reference.

The Attestation Report of the independent registered public accounting firm on management’s assessment of the Company’s internal control over financial reporting appears on page F-2 of the Company’s 2006 Annual Report to Stockholders which is incorporated herein by reference.

Item 9B. Other Information

None

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PART III

Item 10. Directors and Executive Officers of the Registrant

A listing of and information about the Company’s Directors and Executive Officers appears on pages 3 through 5 of the Company’s proxy statement dated March 15, 2007 which is incorporated herein by reference.

Item 11. Executive Compensation

The information required by this Item is presented under the heading “Proposal I - Election of Directors” on pages 3 through 18 of the Company’s proxy statement dated March 15, 2007 which is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership of Certain Beneficial Owners and Management is presented on pages 2 through 4 of the Company’s proxy statement dated March 15, 2007 which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

Certain Relationships and Related Transactions are presented on pages 17 and 18 of the Company’s proxy statement dated March 15, 2007 which is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

The disclosure required by this Item is set forth under the heading “Proposal 2-Ratification of Appointment of Independent Registered Public Accounting Firm” on pages 18 and 19 of the Company’s proxy statement dated March 15, 2007 which is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)Documents

(1)Financial Statements: All financial statements are included in Item 8 of Part II of this Report.

(2)Financial Statement Schedules: All financial statement schedules have been omitted because they are not required, not applicable or are included in the consolidated financial statements or related notes.

(3)Exhibits: The exhibits listed in paragraph (c) below are filed herewith or incorporated herein by reference to other filings.

(b)Required Exhibits

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EXHIBIT INDEX

Exhibit	Description
3.1	Certificate of Incorporation of Brookline Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to a previously filed Registration Statement)*
3.2	Bylaws of Brookline Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to a previously filed Registration Statement)*
4	Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4 to a previously filed Registration Statement)*
10.1	Form of Employment Agreement (incorporated by reference to Exhibit 10.1 to a previously filed Registration Statement)**
10.2	Form of Change in Control Agreement (incorporated by reference to the Form 10-K filed on March 10, 2004)
10.3	Supplemental Retirement Income Agreement with Richard P. Chapman, Jr. (incorporated by reference to Exhibit 10.3 to a previously filed Registration Statement)**
10.3.1	Amendment No. 2 to the Supplemental Retirement Income Agreement by and between Brookline Bank and Richard P. Chapman, Jr.
10.4	Supplemental Retirement Income Agreement with Charles H. Peck (incorporated by reference to Exhibit 10.5 to a previously filed Registration Statement)**
10.4.1	Amendment No. 2 to the Supplemental Retirement Income Agreement by and between Brookline Bank and Charles H. Peck
10.5	Amended Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.6 to Form 10-K filed on March 23, 2000 and Exhibit 10.6 to Form 10-Q filed on November 14, 2000)
10.6	Sixth and Seventh Amendment to Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.6 to Form 10-K filed on March 25, 2002)
10.7	Amendment to Employment Agreement with Richard P. Chapman, Jr. (incorporated by reference to Exhibit 10.7 to Form 10-Q filed on May 3, 2006)
10.8	Amendment to Employment Agreement with Charles H. Peck (incorporated by reference to Exhibit 10.8 to Form 10-Q filed May 3, 2006)
10.9	Amended and Restated Employee Stock Ownership Plan effective January 1, 2006 and adopted June 15, 2006 (incorporated by reference to Exhibit 10.9 to Form 10-Q filed on August 2, 2006)
11	Statement Regarding Computation of Per Share Earnings
13	2006 Annual Report to Stockholders
14	Code of Ethics (incorporated by reference to Exhibit 14 to Form 10-K filed on March 10, 2006)
21	Subsidiaries of the Registrant - This information is presented in Part I, Item 1. Business - Subsidiary Activities of this Report.
23	Consent of Independent Registered Public Accounting Firm
31.1	Certification of Chief Executive Officer
31.2	Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer

*Registration Statement on Form S-1 filed by the Company with the Securities and Exchange Commission on April 10, 2002 (Registration No. 333-85980)

**Registration Statement on Form S-1 filed by the Company with the Securities and Exchange Commission on November 18, 1997 (Registration No. 333-40471)

(c)Other Required Financial Statements and Schedules

Not applicable

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BROOKLINE BANCORP, INC.

Date: February 23, 2007	By:	/s/ Richard P. Chapman, Jr.
		Richard P. Chapman, Jr.
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By:	/s/ Richard P. Chapman, Jr.	By:	/s/ Paul R. Bechet
	Richard P. Chapman, Jr., President, Chief Executive Officer and Director		Paul R. Bechet, Senior Vice President, Treasurer and Chief Financial Officer
	(Principal Executive Officer)		(Principal Financial and Accounting Officer)

By:	/s/ Dennis S. Aronowitz	By:	/s/ Charles H. Peck
	Dennis S. Aronowitz, Director		Charles H. Peck, Director
	Date: February 12, 2007		Date: February 15, 2007

By:	/s/ George C. Caner, Jr.	By:	/s/ Hollis W. Plimpton, Jr.
	George C. Caner, Jr., Director		Hollis W. Plimpton, Jr., Director
	Date: February 15, 2007		Date: February 12, 2007

By:	/s/ David C. Chapin	By:	/s/ Joseph J. Slotnik
	David C. Chapin, Director		Joseph J. Slotnik, Director
	Date: February 15, 2007		Date: February 12, 2007

By:	/s/ William G. Coughlin	By:	/s/ William V. Tripp, III
	William G. Coughlin, Director		William V. Tripp, III, Director
	Date: February 15, 2007		Date: February 15, 2007

By:	/s/ John J. Doyle, Jr.	By:	/s/ Rosamond B. Vaule
	John J. Doyle, Jr., Director		Rosamond B. Vaule, Director
	Date: February 15, 2007		Date: February 14, 2007

By:	/s/ John L. Hall, II	By:	/s/ Peter O. Wilde
	John L. Hall, II, Director		Peter O. Wilde, Director
	Date: February 16, 2007		Date: February 15, 2007

By:	/s/ John J. Mc Glynn	By:	/s/ Franklin Wyman, Jr.
	John J. Mc Glynn, Director		Franklin Wyman, Jr., Director
	Date: February 15, 2007		Date: February 16, 2007

25

EX-10.3.1

Exhibit 10.3.1

AMENDMENT NO. 2
TO THE
SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
BY AND BETWEEN
BROOKLINE BANK
AND
RICHARD P. CHAPMAN, JR.

WHEREAS, Richard P. Chapman, Jr. (“Employee”) and Brookline Bank (the “Bank”) are parties to a Supplemental Retirement Income Agreement which was originally effective February 28, 1995 and amended in 1999 (the “Agreement”); and

WHEREAS, the Bank and the Employee wish to amend the Agreement to clarify that the annual “Average Compensation” on which the retirement benefit is based includes salary and bonus but excludes all except a limited amount ($20,000) of other items that may be considered “compensation” for purposes of federal income taxes; and

WHEREAS, the Bank and the Employee wish to amend the definition of Normal Retirement Benefit to clarify the method for determining the value of any lump distribution from the Savings Bank Employee Retirement Association Pension Plan for purposes of the offset to the Normal Retirement Benefit; and

WHEREAS, the Bank and the Employee wish to amend the definition of “Benefit Period” to clarify that in the event the Employee dies while still employed by the Bank, the benefit period shall end 240 months thereafter, which is similar to the treatment of a benefit period in the event of retirement prior to death (in which event the benefit period is the later to occur of death or the expiration of 240 months after retirement); and

WHEREAS, the Bank and the Employee wish to amend the Agreement to either clarify or eliminate certain provisions that are no longer relevant or necessary due to the passage of time.

NOW THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree to the following amendments to the Agreement:

1.             The definition of “Average Compensation” set forth in Section 1 of the Agreement is hereby amended for clarification purposes as follows:

“Average Compensation” shall mean the average of the Compensation received by the Employee in the three (3) calendar years in the ten (10) calendar-year period prior to the Employee’s Retirement which produces the highest rate of Compensation.

2.             The definition of “Benefit Period” set forth in Section 1 is hereby amended to read in its entirety as follows:

“Benefit Period” shall mean, in the case where Employee Retires prior to death, the period commencing on the date the Employee Retires and ending on the later to occur of (i) said Employee’s death or (ii) the expiration of 240 months from the Employee’s Retirement; and in the case where the Employee dies while still employed by the Bank, the period commencing on the date of the Employee’s death and ending on the later to occur of (i) the expiration of 240 months from the Employee’s death and (ii) the date upon which Employee would have attained (if he had survived to such date) the Life Expectancy Age.

3.             The definition of “Compensation” set forth in Section 1 is hereby amended to read in its entirety as follows:

“Compensation” shall mean the Employee’s total annual base salary and bonus, and no more than $20,000 of other items that may be considered “compensation” for purposes of federal income taxes (such as vested restricted stock shares and the “spread” realized in connection with exercises of stock options).

4.             The definition of “Normal Retirement Benefit” set forth in Section 1 is hereby amended to read in its entirety as follows:

“Normal Retirement Benefit” shall mean an annual sum which is equal to seventy percent (70%) of Average Compensation reduced by the Actuarial Equivalent Benefit of any distribution which the Employee, his beneficiaries or his estate are entitled to receive from the Savings Banks Employee Retirement Association Pension Plan or any other qualified retirement plan maintained by the Bank

derived from Bank contributions and one-half of any Social Security benefits.

5.             Section 1 is hereby amended to add the following defined term:

“Actuarial Equivalent Benefit” shall mean an amount of equal value expressed as an amount of income payable for the Benefit Period.  All actuarial calculations shall use the following assumptions:

Mortality:	1971 Individual Annuity Mortality Table set back three years,
Interest:	6% per annum

or such other rates as would be required of a qualified plan pursuant to Internal Revenue Code Section 417(e) or any amendment or successor thereto.

6.             The definition of “Total Disability” or “Totally Disabled” set forth in Section 1 is hereby deleted in its entirety.

7.             Section 6, captioned “Disability,” is hereby deleted in its entirety.

8.             The definition of “Early Retirement Benefit” set forth in Section 1 is hereby deleted in its entirety.

9.             Section 4 is hereby amended to eliminate any reference to an Early Retirement Benefit, and as amended shall read in its entirety as follows,:

(a)   Except as set forth in (b) below, commencing on the first day of the first month after the Employee’s Retirement, and on the first day of each month thereafter until the expiration of the Benefit Period, the Bank shall pay to the Employee (or to the Beneficiary if the Employee is not then living) an amount equal to the Monthly Benefit.  Alternatively, and at any time, in lieu of future Monthly Benefits due hereunder, the Bank may elect a Lump Sum benefit payment to Employee or the Beneficiary, as the case may be.

(b)   Notwithstanding anything herein to the contrary, in the event of (i) a Change in Control; (ii) the Bank’s Tier 1 or primary capital falls below 6%, or (iii) the combined capital ratio of the Bank and the Company falls below 7%, the Employee shall have an irrevocable right to request an immediate lump sum payment of the actuarial equivalent present value of the Normal Retirement Benefit.

10.           All other terms and provisions of the Agreement shall remain unchanged and in full force and effect.

2

IN WITNESS WHEREOF, Brookline Bank and Brookline Bancorp, Inc. have caused this Amendment No. 2 to the Agreement to be executed and their seal to be affixed hereunto by its duly authorized officer, and the Employee has signed this Amendment No. 2 on the 7th day of February, 2007.

BROOKLINE BANK

By: /s/ William V. Tripp, III

   William V. Tripp, III

BROOKLINE BANCORP, INC.

By: /s/ William V. Tripp, III

   William V. Tripp, III

EMPLOYEE

/s/ Richard P. Chapman, Jr

 Richard P. Chapman, Jr.

3

EX-10.4.1

Exhibit 10.4.1

AMENDMENT NO. 2

TO THE

SUPPLEMENTAL RETIREMENT INCOME AGREEMENT

BY AND BETWEEN

BROOKLINE BANK

AND

CHARLES H. PECK

WHEREAS, Charles H. Peck (“Employee”) and Brookline Bank (the “Bank”) are parties to a Supplemental Retirement Income Agreement which was originally effective February 28, 1995 and amended in 1999 (the “Agreement”); and

WHEREAS, the Bank and the Employee wish to amend the Agreement to clarify that the annual “Average Compensation” on which the retirement benefit is based includes salary and bonus but excludes all except a limited amount ($10,000) of other items that may be considered “compensation” for purposes of federal income taxes; and

WHEREAS, the Bank and the Employee wish to amend the definition of Normal Retirement Benefit to clarify the method for determining the value of any lump distribution from the Savings Bank Employee Retirement Association Pension Plan for purposes of the offset to the Normal Retirement Benefit; and

WHEREAS, the Bank and the Employee wish to amend the definition of “Benefit Period” to clarify that in the event the Employee dies while still employed by the Bank, the benefit period shall end 180 months thereafter, which is similar to the treatment of a benefit period in the event of retirement prior to death (in which event the benefit period is the later to occur of death or the expiration of 180 months after retirement); and

WHEREAS, the Bank and the Employee wish to amend the Agreement to either clarify or eliminate certain provisions that are no longer relevant or necessary due to the passage of time.

NOW THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree to the following amendments to the Agreement:

1.             The definition of “Average Compensation” set forth in Section 1 of the Agreement is hereby amended for clarification purposes as follows:

“Average Compensation” shall mean the average of the Compensation received by the Employee in the three (3) calendar years in the ten (10) calendar-year period prior to the Employee’s Retirement which produces the highest rate of Compensation.

2.             The definition of “Benefit Period” set forth in Section 1 is hereby amended to read in its entirety as follows:

“Benefit Period” shall mean, in the case where Employee Retires prior to death, the period commencing on the date the Employee Retires and ending on the later to occur of (i) said Employee’s death or (ii) the expiration of 180 months from the Employee’s Retirement; and in the case where the Employee dies while still employed by the Bank, the period commencing on the date of the Employee’s death and ending on the later to occur of (i) the expiration of 180 months from the Employee’s death and (ii) the date upon which Employee would have attained (if he had survived to such date) the Life Expectancy Age.

3.             The definition of “Compensation” set forth in Section 1 is hereby amended to read in its entirety as follows:

“Compensation” shall mean the Employee’s total annual base salary and bonus, and no more than $10,000 of other items that may be considered “compensation” for purposes of federal income taxes (such as vested restricted stock shares and the “spread” realized in connection with exercises of stock options).

4.             The definition of “Normal Retirement Benefit” set forth in Section 1 is hereby amended to read in its entirety as follows:

“Normal Retirement Benefit” shall mean an annual sum which is equal to seventy percent (70%) of Average Compensation reduced by the Actuarial Equivalent Benefit of any distribution which the Employee, his beneficiaries or his estate are entitled to receive from the Savings Banks Employee

Retirement Association Pension Plan or any other qualified retirement plan maintained by the Bank derived from Bank contributions and one-half of any Social Security benefits.

5.             Section 1 is hereby amended to add the following defined term:

“Actuarial Equivalent Benefit” shall mean an amount of equal value expressed as an amount of income payable for the Benefit Period.  All actuarial calculations shall use the following assumptions:

Mortality:	1971 Individual Annuity Mortality Table set back three years,
Interest:	6% per annum

or such other rates as would be required of a qualified plan pursuant to Internal Revenue Code Section 417(e) or any amendment or successor thereto.

6.             The definition of “Total Disability” or “Totally Disabled” set forth in Section 1 is hereby deleted in its entirety.

7.             Section 6, captioned “Disability,” is hereby deleted in its entirety.

8.             The definition of “Early Retirement Benefit” set forth in Section 1 is hereby deleted in its entirety.

9.             Section 4 is hereby amended to eliminate any reference to an Early Retirement Benefit, and as amended shall read in its entirety as follows,:

(a)   Except as set forth in (b) below, commencing on the first day of the first month after the Employee’s Retirement, and on the first day of each month thereafter until the expiration of the Benefit Period, the Bank shall pay to the Employee (or to the Beneficiary if the Employee is not then living) an amount equal to the Monthly Benefit.  Alternatively, and at any time, in lieu of future Monthly Benefits due hereunder, the Bank may elect a Lump Sum benefit payment to Employee or the Beneficiary, as the case may be.

(b)   Notwithstanding anything herein to the contrary, in the event of (i) a Change in Control; (ii) the Bank’s Tier 1 or primary capital falls below 6%, or (iii) the combined capital ratio of the Bank and the Company falls below 7%, the Employee shall have an irrevocable right to request an immediate lump sum payment of the actuarial equivalent present value of the Normal Retirement Benefit.

10.           All other terms and provisions of the Agreement shall remain unchanged and in full force and effect.

2

IN WITNESS WHEREOF, Brookline Bank and Brookline Bancorp, Inc. have caused this Amendment No. 2 to the Agreement to be executed and their seal to be affixed hereunto by its duly authorized officer, and the Employee has signed this Amendment No. 2 on the 7th day of February, 2007.

BROOKLINE BANK
By:	/s/ William V. Tripp, III
	William V. Tripp, III
BROOKLINE BANCORP, INC.
By:	/s/ William V. Tripp, III
	William V. Tripp, III
EMPLOYEE
/s/ Charles H. Peck
Charles H. Peck

3

EX-11

Exhibit 11

Statement Regarding Computation of Per Share Earnings

The following table is the reconciliation of basic and diluted earnings per share for the years ended December 31, 2006, 2005 and 2004 (dollars in thousands except per share amounts):

	2006				2005				2004
	Basic		Diluted		Basic		Diluted		Basic		Diluted
Net income	$	20,812	$	20,812	$	22,030	$	22,030	$	17,767	$	17,767
Weighted average shares outstanding	60,369,558		60,369,558		60,054,059		60,054,059		57,278,329		57,278,329
Effect of dilutive securities	—		703,933		—		782,152		—		849,903
Adjusted weighted average shares outstanding	60,369,558		61,073,491		60,054,059		60,836,211		57,278,329		58,128,232
Earning per share	$	0.34	$	0.34	$	0.37	$	0.36	$	0.31	$	0.31

EX-13

Exhibit 13

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial and other data of the Company set forth below is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and Notes thereto presented elsewhere in this Annual Report.

			At December 31,
	2006		2005		2004		2003		2002
			(In thousands)
Selected Financial Condition Data:
Total assets	$	2,373,040	$	2,214,704	$	1,694,499	$	1,524,034	$	1,423,357
Loans	1,792,062		1,636,755		1,269,637		1,074,740		807,425
Allowance for loan losses (1)	23,024		22,248		17,540		16,195		15,052
Debt securities:
Available for sale	332,571		371,363		251,392		276,623		347,211
Held to maturity	233		410		889		1,343		4,861
Marketable equity securities	2,675		3,543		9,460		11,329		13,838
Goodwill and identified intangible assets	50,893		45,086		—		—		—
Retail deposits	1,210,206		1,168,307		773,958		679,921		649,325
Brokered deposits	78,060		—		—		—		—
Borrowed funds and subordinated debt	475,898		423,725		320,171		220,519		124,900
Stockholders’ equity	582,893		602,450		585,013		606,684		632,381
Non-performing loans	900		480		111		50		5
Non-performing assets	1,959		973		439		133		5

(1)The amount at December 31, 2006 is net of a $1,286 transfer to an allowance for unfunded loan commitments which is included in other liabilities.

				Year ended December 31,
	2006			2005			2004			2003			2002
				(In thousands)
Selected Operating Data:
Interest income	$	132,650		$	107,096		$	72,110		$	66,210		$	71,497
Interest expense	62,471			39,050			21,124			18,608			25,519
Net interest income	70,179			68,046			50,986			47,602			45,978
Provision (credit) for loan losses	2,549			2,483			2,603			1,288			(250		)
Net interest income after provision (credit) for loan losses	67,630			65,563			48,383			46,314			46,228
Gains on securities, net	558			853			1,767			2,102			8,698
Loss from prepayment of FHLB advances	—			—			—			—			(7,776		)
Other non-interest income	3,292			4,444			3,443			3,251			2,458
Merger/conversion expense	—			(894		)	—			—			—
Amortization of identified intangible assets	(2,234		)	(2,370		)	—			—			—
Other non-interest expense	(34,635		)	(30,693		)	(22,989		)	(22,187		)	(15,304		)
Income before income taxes and minority interest	34,611			36,903			30,604			29,480			34,304
Provision for income taxes	(13,614		)	(14,873		)	(12,837		)	(12,212		)	(12,369		)
Retroactive assessment related to REIT	—			—			—			(2,788		)	—
Net income before minority interest	20,997			22,030			17,767			14,480			21,935
Minority interest in earnings of subsidiary	185			—			—			—			—
Net income	$	20,812		$	22,030		$	17,767		$	14,480		$	21,935

SELECTED FINANCIAL RATIOS AND OTHER DATA

	At or For the Year Ended December 31,
	2006			2005			2004			2003			2002
Performance Ratios:
Return on average assets	0.89		%	1.01		%	1.10		%	1.00		%	1.68		%
Return on average stockholders’ equity	3.53			3.61			2.99			2.36			4.81
Interest rate spread (1)	2.14			2.48			2.34			2.26			2.41
Net interest margin (1)	3.13			3.24			3.21			3.34			3.58
Dividend payout ratio	217.65			200.00			238.71			216.00			83.16
Capital Ratios:
Stockholders’ equity to total assets at end of year	24.56			27.20			34.52			39.81			44.43
Tier 1 core capital ratio at end of year (2)	19.39			20.64			27.66			31.53			34.37
Asset Quality Ratios:
Non-performing assets as a percent of total assets at end of year	0.08			0.04			0.03			0.01			—
Allowance for loan losses as a percent of loans at end of year (3)	1.28			1.36			1.38			1.51			1.86
Per Share Data:
Basic earnings per common share (4)	$	0.34		$	0.37		$	0.31		$	0.25		$	0.38
Diluted earnings per common share (4)	$	0.34		$	0.36		$	0.31		$	0.25		$	0.38
Number of shares outstanding at end of year (in thousands) (5)	61,584			61,584			59,143			58,825			58,545
Dividends paid per common share (4)	$	0.74		$	0.74		$	0.74		$	0.54		$	0.316
Book value per common share at end of year	$	9.47		$	9.78		$	9.89		$	10.31		$	10.80
Tangible book value per common share at end of year	$	8.64		$	9.05		$	9.89		$	10.31		$	10.80
Market value per common share at end of year	$	13.17		$	14.17		$	16.32		$	15.34		$	11.90

(1)Calculated on a fully-taxable equivalent basis.

(2)This regulatory ratio relates only to Brookline Bank.

(3)The allowance for loan losses at December 31, 2006 is net of a $1,286 (in thousands) transfer to an allowance for unfunded loan commitments which is included in other liabilities. If the transfer had not been made, the allowance as a percent of total loans at December 31, 2006 would have been 1.36%.

(4)Amounts are restated to give retroactive recognition to the exchange ratio (2.186964 new shares for each old share) applied in the conversion that was completed on July 9, 2002.

(5)Common stock issued less treasury stock.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following should be read in conjunction with the Consolidated Financial Statements of Brookline Bancorp, Inc. (the “Company”) and the Notes thereto presented elsewhere in this Annual Report.

Forward-Looking Statements and Factors Affecting Those Statements

The following discussion contains forward-looking statements based on management’s current expectations regarding factors that may affect the Company’s earnings and financial condition in the future. Any statements herein that are not statements of historical fact are likely to be forward-looking statements. Any statements 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 are forward-looking statements.

These forward-looking statements, implicitly and explicitly, include the underlying assumptions and information used by management to establish plans, objectives, goals and expectations. 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 financial performance to differ materially from the objectives, expectations, forecasts and projections expressed in the forward-looking statements:

·Interest rate policies of the Federal Open Market Committee of the Federal Reserve System. The Company’s results of operations depend significantly on the interest rate environment. Changes in interest rates can affect profitability, stockholders’ equity, the carrying value and average life of assets, the demand for loans, the collectibility of loans and investment securities, and the flow and mix of deposits. Continuation of the inverted yield curve environment which existed for much of 2006 would likely have an adverse effect on the Company’s profitability in 2007.

·Changes in the local real estate market. A significant part of the Company’s loan portfolio ($1.1 billion) is concentrated in commercial, multi-family, residential and construction loans secured by real estate located primarily in eastern Massachusetts. Changes in the real estate market could affect the Company’s volume of loan originations and the level of loan losses it experiences.

·Changes in the local, regional and national economy. In addition to real estate loans, the Company’s loan portfolio includes $540 million of indirect automobile loans and $128 million of loans to finance equipment to small businesses. Changes in the economy could affect the ability of borrowers to repay loans, the demand for loans and the level of loan losses the Company experiences.

·Acquisitions and other growth initiatives. On January 7, 2005, the Company acquired Mystic Financial, Inc. (“Mystic”) and, on April 13, 2006, the Company increased its ownership interest in Eastern Funding LLC (“Eastern”) from approximately 28% to 87%. Additionally, in 2006, the Company recruited experienced loan officers to expand commercial business lending. The Company continues to seek additional acquisitions and to expand through the offering of expanded services and the opening of new branches. While acquisitions and other growth activities are important to the long-term success of the Company, there are risks associated with such initiatives. The initiatives often require investments and expenditures that can have a negative effect on operating results in the short-term and cause significant adverse consequences if the initiatives are not executed satisfactorily.

Executive Level Overview

An inverted yield curve environment existed for much of 2006. The resulting shrinkage between rates earned on loans and investment securities and rates paid on deposits and liabilities had a negative effect on profitability.

A significant part of the Company’s growth in assets and profitability in 2005 resulted from the Mystic acquisition. The acquisition of a controlling interest in Eastern in 2006 was immediately accretive to earnings and a contributing factor to asset growth in that year.

1

The following is a summary of operating and financial condition highlights as of and for each of the years in the three year period ended December 31.

Operating Highlights

	Year ended December 31,
	2006			2005			2004
	(In thousands except per share amounts)
Net interest income	$	70,179		$	68,046		$	50,986
Provision for loan losses	2,549			2,483			2,603
Non-interest income	3,850			5,297			5,210
Merger/conversion expense	—			894			—
Amortization of identified intangible assets	2,234			2,370			—
Other non-interest expense	34,635			30,693			22,989
Income before income taxes and minority interest	34,611			36,903			30,604
Provision for income taxes	13,614			14,873			12,837
Minority interest in earnings of subsidiary	185			—			—
Net income	20,812			22,030			17,767
Basic earning per common share	$	0.34		$	0.37		$	0.31
Diluted earning per common share	0.34			0.36			0.31
Interest rate spread	2.14		%	2.48		%	2.34		%
Net interest margin	3.13		%	3.24		%	3.21		%

Financial Condition Highlights

	At December 31,
	2006			2005			2004
	(In thousands)
Total assets	$	2,373,040		$	2,214,704		$	1,694,499
Net loans	1,769,038			1,614,507			1,252,097
Retail deposits	1,210,206			1,168,307			773,958
Brokered deposits	78,060			—			—
Borrowed funds and subordinated debt	475,898			423,725			320,171
Stockholders’ equity	582,893			602,450			585,013
Non-performing assets	$	1,959		$	973		$	439
Stockholders’ equity to total assets	24.56		%	27.20		%	34.52		%

Operating and financial condition highlights were influenced by the following:

·The continued pressure on interest rate spread and net interest margin

·The acquisition of a controlling interest in Eastern in 2006

·The acquisition of Mystic in 2005

·Continued growth of the indirect automobile loan portfolio

·A decline in the mortgage loan portfolio

·Fluctuation in the provisions for loan losses attributable to the Company’s loan segments

·Lower non-interest income in 2006 due primarily to reduced mortgage loan prepayment fees

·Higher non-interest expenses due primarily to inclusion of Eastern in 2006 and Mystic in 2005

2

Commentary on each of these factors is presented on the following pages.

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

The following table sets forth information about the Company’s average balances, interest income and rates earned on average interest-earning assets, interest expense and rates paid on interest-bearing liabilities, interest rate spread and net interest margin for 2006, 2005 and 2004. Average balances are derived from daily average balances and yields include fees and costs which are considered adjustments to yields.

	Year ended December 31,
	2006							2005							2004
	Average balance			Interest (1)		Average yield/ cost		Average balance			Interest (1)		Average yield/ cost		Average balance			Interest (1)		Average yield/ cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Short-term investments	$	108,522		$	5,338	4.92	%	$	139,294		$	4,356	3.13	%	$	116,260		$	1,540	1.32	%
Debt securities (2)	354,174			15,292		4.32		339,097			11,332		3.34		266,932			6,366		2.38
Equity securities (2)	30,174			1,656		5.49		30,367			1,347		4.44		25,495			814		3.19
Mortgage loans (3)	1,078,769			69,015		6.40		1,097,411			67,248		6.13		826,227			48,818		5.91
Commercial loans — Eastern (3)	90,837			9,838		10.83		—			—		—		—			—		—
Other commercial loans (3)	66,744			4,643		6.96		74,119			4,477		6.04		42,862			2,073		4.84
Indirect automobile loans (3)	522,977			27,019		5.17		428,365			18,436		4.30		314,538			12,460		3.96
Consumer loans (3)	3,030			229		7.56		2,951			210		7.12		2,386			176		7.38
Total interest-earning assets	2,255,227			133,030		5.90	%	2,111,604			107,406		5.09	%	1,594,700			72,247		4.53	%
Allowance for loan losses	(24,261		)					(21,487		)					(16,758		)
Non interest-earning assets	102,244							97,575							31,735
Total assets	$	2,333,210						$	2,187,692						$	1,609,677
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Deposits:
NOW accounts	$	89,008		219		0.25	%	$	96,853		213		0.22	%	$	62,543		86		0.14	%
Savings accounts	112,774			1,804		1.60		147,922			2,014		1.36		69,364			1,173		1.69
Money market savings accounts	219,533			5,335		2.43		268,026			4,330		1.62		279,590			3,295		1.18
Retail certificates of deposit	684,503			28,417		4.15		556,212			16,615		2.99		274,034			7,154		2.61
Total retail deposits	1,105,818			35,775		3.24		1,069,013			23,172		2.17		685,531			11,708		1.71
Brokered certificates of deposit	49,598			2,663		5.37		—			—		—		—			—		—
Total deposits	1,155,416			38,438		3.33		1,069,013			23,172		2.17		685,531			11,708		1.71
Borrowed funds	491,946			23,127		4.70		413,555			15,192		3.67		280,739			9,416		3.35
Subordinated debt	12,160			906		7.45		11,964			686		5.73		—			—		—
Total interest-bearing liabilities	1,659,522			62,471		3.76	%	1,494,532			39,050		2.61	%	966,270			21,124		2.19	%
Non-interest-bearing demand checking accounts	61,869							67,081							35,789
Other liabilities	22,655							15,928							14,349
Total liabilities	1,744,046							1,577,541							1,016,408
Stockholders’ equity	589,164							610,151							593,269
Total liabilities and stockholders’ equity	$	2,333,210						$	2,187,692						$	1,609,677
Net interest income (tax equivalent basis)/interest rate spread				70,559		2.14	%				68,356		2.48	%				51,123		2.34	%
Less adjustment of tax exempt income				380							310							137
Net interest income				$	70,179						$	68,046						$	50,986
Net interest margin						3.13	%						3.24	%						3.21	%

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

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

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

3

Highlights from the table on the preceding page follow.

·Interest rate spread fluctuated from 2.34% in 2004 to 2.48% in 2005 and 2.14% in 2006 primarily as a result of a shift in the interest rate environment. As interest rates started to rise in mid-2004, asset yields increased faster than the increase in funding costs. That trend started to reverse in the latter part of 2005 and continued throughout 2006 as the yield curve first became flatter and ultimately became inverted.

·Offsetting part of the adverse consequences resulting from changes in the interest rate environment was the benefit derived from the increase in loans outstanding as a percent of total interest-earning assets outstanding from 74% in 2004 to 76% in 2005 and 78% in 2006. Generally, the yield on loans is higher than the yield on investment securities.

·The trend in net interest margin was similar to that in interest rate spread, although less pronounced in degree of fluctuation. Increased revenues derived from the increase in loans as a percent of total interest-earning assets was partially offset by the effect of a decline in the percent of total assets funded by stockholders’ equity from 37% in 2004 to 28% in 2005 and 25% in 2006.

·Average interest-earning assets increased $144 million, or 7%, in 2006 compared to $517 million, or 32%, in 2005 and $165 million, or 12% in 2004. The increase in 2006 was attributable primarily to the acquisition of Eastern and growth of the indirect automobile loan portfolio. The increase in 2005 was attributable primarily to the acquisition of Mystic and growth of the indirect automobile loan portfolio.

·The average balance of mortgage loans outstanding declined $19 million, or 2%, in 2006 compared to 2005 due in part to increased competitive pressure that drove down the pricing of new mortgage loan originations. Without improvement in pricing, the Company will be inclined to continue to approach mortgage loan originations with caution.

·The acquisition of Eastern and loan growth in 2006 were funded primarily by a combination of higher costing borrowings from the Federal Home Loan Bank (“FHLB”) and brokered certificates of deposit and to a lesser extent by a reduction in short-term investments.

·Customarily, higher rates are paid on certificates of deposit than on transaction-related deposits. Retail certificates of deposit comprised 62% of the average of total retail deposits in 2006 compared to 52% in 2005 and 40% in 2004. This shift in the mix of deposits resulted primarily from the changes in the interest rate environment mentioned above as well as increased competition for deposits.

As we have mentioned frequently in prior reports, interest rate spread and net interest margin are greatly influenced by interest rates established by the Federal Reserve. Commencing in June 2004 and extending through June 2006, the Federal Open Market Committee of the Federal Reserve System approved 17 rate increases of 0.25% each in the federal funds rate for overnight borrowings between banks. Since June 2006, the Federal Reserve has left the federal funds borrowing rate unchanged at 5.25%. The combination of the rate setting actions of the Federal Reserve and trends in economic indicators such as the rate of inflation, the rate of economic growth, unemployment and the housing market caused the migration of the yield curve from an upward slope to an inverted slope. Improvement in interest rate spread and net interest margin will continue to be difficult to achieve until the slope of the yield curve starts to move upward.

Since the second half of 2003, the Company has paid an extra dividend of $0.20 per share semi-annually. It is worth noting that each extra dividend of $0.20 per share reduces stockholders’ equity by approximately $12 million and interest income by the amount that otherwise would be earned if the dividend were not paid.

4

Rate/Volume Analysis

The following table presents, on a tax equivalent basis, the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the years indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

	Year ended December 31, 2006 compared to year ended December 31, 2005									Year ended December 31, 2005 compared to year ended December 31, 2004
	Increase (decrease)									Increase (decrease)
	due to									due to
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)
Interest income:
Short-term investments	$	(1,116	)	$	2,098		$	982		$	358		$	2,458		$	2,816
Debt securities	523			3,437			3,960			1,999			2,967			4,966
Equity securities	(9		)	318			309			175			358			533
Mortgage loans	(1,156		)	2,923			1,767			16,557			1,873			18,430
Commercial loans - Eastern	9,838			—			9,838			—			—			—
Other commercial loans	(472		)	638			166			1,911			493			2,404
Indirect automobile loans	4,500			4,083			8,583			4,824			1,152			5,976
Other consumer loans	6			13			19			40			(6		)	34
Total interest income	12,114			13,510			25,624			25,864			9,295			35,159
Interest expense:
Deposits:
NOW accounts	(18		)	24			6			61			66			127
Savings accounts	(527		)	317			(210		)	1,108			(267		)	841
Money market savings accounts	(888		)	1,893			1,005			(141		)	1,176			1,035
Retail certificates of deposit	4,388			7,414			11,802			8,299			1,162			9,461
Total retail deposits	2,955			9,648			12,603			9,327			2,137			11,464
Brokered certificates of deposit	2,663			—			2,663			—			—			—
Total deposits	5,618			9,648			15,266			9,327			2,137			11,464
Borrowed funds	3,205			4,730			7,935			4,808			968			5,776
Subordinated debt	11			209			220			686			—			686
Total interest expense	8,834			14,587			23,421			14,821			3,105			17,926
Net change in net interest income	$	3,280		$	(1,077	)	$	2,203		$	11,043		$	6,190		$	17,233

Highlights from the above table follow.

·All of the increase in net interest income in 2006 resulted from asset growth, the most notable part of which was the added interest income resulting from the high yielding loans obtained through the Eastern acquisition. Part of the benefit derived from the asset growth was offset by the reduction in interest rate spread discussed in the previous subsection of this report.

·The increase in net interest income in 2005 resulted from the combination of asset growth (most of which came from the Mystic acquisition) and a better interest rate spread.

Acquisition of Controlling Interest in Eastern

On April 13, 2006, the Company increased its ownership interest in Eastern from approximately 28% to 87%. Eastern specializes primarily in the financing of coin-operated laundry, dry cleaning and convenience store equipment and businesses in the greater metropolitan New York area and selected other locations in the Northeast. These loans earn higher yields of interest because the borrowers are typically small businesses that lack the capital to borrow funds at lower rates of interest. While the loan loss experience of Eastern since its founding in 1997 has been very good, deterioration in the economy could result in a higher level of loan losses in the future.

The purchase was completed through payment of $16.6 million in cash, including transaction costs. The acquisition added $115 million to the Company’s assets, $108 million of which were loans. Total loans outstanding increased to $127 million at December 31, 2006.

5

As part of the acquisition, the Company paid off Eastern’s borrowed funds ($95 million) and replaced those borrowings primarily with funds obtained through brokered certificates of deposit. The ability of the Company to finance Eastern’s loan portfolio at lower interest rates than those that Eastern would have had to pay if it continued as a stand-alone entity was a major reason why the Company made the acquisition. Inclusion of Eastern’s results of operations was immediately accretive to the consolidated earnings of the Company. See note 2 to the consolidated financial statements appearing elsewhere herein for additional information about the acquisition.

Acquisition of Mystic

The Company acquired Mystic on January 7, 2005. The acquisition added $483 million to the Company’s assets at that date (including goodwill of $35.6 million and a core deposit intangible of $11.8 million) and $420 million to the Company’s liabilities (including deposits of $332 million). The issuance of 2,516,525 shares of the Company’s common stock in connection with the acquisition added $39 million to stockholders’ equity.

As part of the acquisition, Mystic was merged into the Company and, on April 11, 2005, the operating systems of Mystic’s bank subsidiary were converted to the operating systems of the Company’s bank subsidiary. Merger/conversion related expenses were $894,000 in 2005, substantially all of which were incurred in the first half of the year. Non-interest expense in 2005 also included $2,370,000 of amortization of the core deposit intangible. Expense for amortization of the core deposit intangible was $2,105,000 in 2006. Amortization of the core deposit intangible, which is deductible for income tax purposes, is occurring over a nine year period on an accelerated basis.

Indirect Automobile Loan Business

The Company’s indirect automobile loan portfolio grew from $369 million at the end of 2004 to $459 million at the end of 2005 and $540 million at the end of 2006. It is expected that this rate of growth will decline in 2007 because of market conditions and the higher level of loan originations required to affect normal monthly principal payments.

In originating indirect automobile loans, there is a strong correlation between interest rates offered and the degree of the borrower’s credit risk. In general, the higher the credit score of the borrower, the lower the interest rate earned. Correspondingly, loan losses are normally lower when credit scores are higher.

When the Company entered into the indirect automobile loan business in February 2003, the Company focused on making loans to individuals with excellent credit histories. While this emphasis has resulted in favorable loan loss experience, it has held back profitability somewhat since high quality loans typically generate lower yields.

Since inception, the Company has originated over 50,000 loans aggregating over $1.1 billion. Less than 10% of the loans originated have been to individuals with credit scores below 660, despite a Company policy limit allowing up to 15% of loan originations to be to borrowers with credit scores below 660. Based on analysis of its loan experience over the past four years, the Company expanded its lending to borrowers with credit scores below 660 in the second half of 2006. The Company expects the resulting increase in income to more than offset any increase in loan losses that might arise from this initiative. The 15% policy limit has not been changed. The percent of loans outstanding with credit scores below 660 was 11% at December 31, 2006 compared to 9% at December 31, 2005. The average credit score of all loans outstanding at December 31, 2006 was 732 compared to 731 at December 31, 2005.

Mortgage Loan Portfolio

Mortgage loans outstanding at December 31, 2006 amounted to $1.082 billion or $64 million less than the amount outstanding at December 31, 2005. In 2005, the mortgage loan portfolio increased $276 million, much of which resulted from the Mystic acquisition.

Shortly after completion of the acquisition, $30 million of fixed rate residential mortgage loans with 15 to 30 year maturities that were in the Mystic loan portfolio were sold to reduce the exposure to loss that would occur in a rising interest rate environment. Construction loans and certain commercially-related loans in the Mystic portfolio were deemed to have higher risk characteristics and, accordingly, efforts were focused on having those loans paid off or strengthened through the obtaining of additional collateral. Throughout 2005 and 2006, the outstanding balance of those mortgage loans declined as a result of loan payments.

While much of the decline in mortgage loans outstanding in 2006 was attributable to payment of loans acquired in the Mystic transaction, part of the decline resulted from increased competitive pressure, especially in the multi-family and commercial real estate mortgage sectors. Competition has caused the market pricing for such loans to adjust downward to levels where the potential profit from originating the loans is skimpy in relation to credit risk undertaken. In the current

6

environment, the Company is selective in the loans it is willing to originate. It is expected that growth of the mortgage loan portfolio in 2007 will be modest.

Provision for Loan Losses

The provision for loan losses was $2,549,000 in 2006, $2,483,000 in 2005 and $2,603,000 in 2004. The provision for loan losses is comprised of amounts relating to the indirect automobile loan portfolio, the Eastern loan portfolio and the remainder of the Company’s loan portfolio.

The provision for loan losses related to the indirect automobile loan portfolio was $3,098,000 in 2006, $2,859,000 in 2005 and $2,199,000 in 2004. The increases were attributable to the growth of the portfolio which was discussed in a prior subsection herein. Net charge-offs were $1,838,000 in 2006, $1,358,000 in 2005 and $1,246,000 in 2004, or 0.35%, 0.32% and 0.40% of the average balance of indirect automobile loans outstanding in those respective years.

The provision for loan losses related to the Eastern loan portfolio was $851,000 since the acquisition in April 2006. Net charge-offs in that period were $515,000, an amount equal to 0.57% of average loans outstanding on an annualized basis.

Regarding the remainder of the Company’s loan portfolio, credits of $1,400,000 and $376,000 were taken into income in 2006 and 2005, respectively, and $404,000 was charged to earnings in 2004. Of the total credit taken to income in 2006, $1,050,000 was credited in the fourth quarter of 2006. Much of that amount ($828,000) resulted from a reduction in the reserve factor applied to the multi-family mortgage loan portfolio. The remainder of the credit in 2006 and the credit in 2005 resulted from reductions in outstanding loans through pay downs, including loans classified as higher risk loans. The provision in 2004 was attributable primarily to growth of the loan portfolio in that year.

See the subsection “Allowance for Loan Losses” appearing elsewhere herein for more information about amounts set aside to absorb loan losses.

Non-Interest Income

Non-interest income was $3,850,000 in 2006 compared to $5,297,000 in 2005 and $5,210,000 in 2004. The decline was due primarily to less fees from prepayment of mortgage loans, a decline in gains from asset sales and lower earnings from Eastern before the Company’s increase in ownership.

Fees from prepayment of mortgage loans declined from $1,506,000 in 2004 and $1,629,000 in 2005 to $246,000 in 2006. Net gains from the sale of marketable equity securities declined from $1,767,000 in 2004 to $853,000 in 2005 and $558,000 in 2006. In 2005, gains of $322,000 were realized from the sale of a building and a foreclosed property obtained in the Mystic acquisition. The Company’s equity interest in the earnings of Eastern amounted to $608,000 in 2004, $445,000 in 2005 and $1,000 in the 2006 period up to the time of the acquisition.

Non-Interest Expense

Non-interest expense included $2,234,000 in 2006 and $2,370,000 in 2005 for the amortization of identified intangible assets resulting from the acquisitions of Mystic and Eastern. Also included in 2005 was $894,000 of merger/conversion expenses related to the Mystic acquisition.

Excluding amortization and merger/conversion expenses, non-interest expense increased from $23.0 million in 2004 to $30.7 million in 2005 and $34.6 million in 2006. The increases resulted primarily from the inclusion of the operations of Mystic since January 2005, the operations of Eastern since April 2006, the opening of a new branch in the fall of 2004 and another in April 2006, the hiring of additional loan officers in 2006, $243,000 of compensation expense in 2006 resulting from the vesting of restricted stock upon the retirement of a member of the Board of Directors, and higher processing and service costs resulting from growth of the indirect automobile loan portfolio.

As a result of adoption of a new accounting pronouncement (SFAS 123-R), effective January 1, 2006, dividends paid on unvested shares awarded to directors, officers and employees of the Company are recognized as compensation expense whereas, prior to that date, such payments were charged to retained earnings. Dividends paid on unvested shares amounted to $415,000 in 2006, $578,000 in 2005 and $732,000 in 2004. The new accounting pronouncement also required that, effective January 1, 2006, dividend equivalent rights payable to holders of outstanding vested stock options be charged to retained earnings; prior to that date, such payments were recognized as compensation expense. Dividend equivalent rights paid or payable to holders of unexercised stock options were $960,000 in 2006, $702,000 in 2005 and $734,000 in 2004.

7

Other Operating Highlights

Provision for Income Taxes. The effective rate of federal and state income taxes applied to the Company’s pre-tax earnings was 39.3% in 2006, 40.3% in 2005 and 41.9% in 2004. The decline in rates was due primarily to (a) a higher portion of taxable income being earned by the Company’s investment security subsidiaries (income in those subsidiaries is subject to a lower rate of state taxation than income earned by the Company’s other subsidiaries), (b) higher tax exempt income from investment in municipal obligations and (c) less state taxes resulting from dividend transfers from Company subsidiaries to the parent Company.

Other Financial Condition Highlights

Deposits. Excluding deposits derived from the Mystic acquisition, retail deposits increased $42 million (4%) in 2006, $62 million (8%) in 2005 and $94 million (14%) in 2004. The increases were due primarily to marketing initiatives and the opening of new branches. The gains came at a considerable cost, however, since the mix of deposits gravitated to more expensive certificates of deposit. That category of deposits represented 61% of total retail deposits at the end of 2006 compared to 55% at the end of 2005 and 41% at the end of 2004.

The Company obtained $78 million of brokered deposits in 2006 and used the funds primarily to pay off some of the higher rate borrowed funds of Eastern. The weighted average maturity of the brokered deposits at origination was 2.2 years and the weighted average annual rate to be paid on the deposits is 5.38%. Obtaining of the brokered deposits did not require the pledging of assets as collateral as is normally the case in borrowings from the FHLB.

Borrowed Funds. Funds borrowed from the FHLB increased $52 million in 2006 to $464 million at December 31, 2006. Excluding $74 million of borrowings assumed in the Mystic acquisition, the Company increased its borrowings from the FHLB by $18 million in 2005 and $99 million in 2004. Proceeds from the borrowings were used primarily to fund loan growth.

Stockholders’ Equity. Stockholders’ equity increased from $585 million at the end of 2004 to $602 million in 2005 and declined to $583 million in 2006. The decline in 2006 was due primarily to payment to stockholders of two semi-annual extra dividends of $0.20 per share. Such payments exceeded earnings and, accordingly, represented a return of capital to stockholders (subject to taxation) rather than a distribution of earnings. The increase in 2005 was due primarily to the issuance of $39 million of common stock in connection with the Mystic acquisition, offset in part by the payment to stockholders of two semi-annual extra dividends of $0.20 per share in excess of earnings.

Since the payment of the first semi-annual extra dividend in August 2003, over $96 million, or $1.60 per share, has been paid to stockholders. Such payments have been an effective means of distributing part of the Company’s excess capital in a measured way that treats all stockholders equally. While it is the intent of the Board of Directors to continue to return capital to stockholders through payment of an extra dividend semi-annually, the magnitude of any future payment will be considered in light of changing opportunities to deploy capital effectively, including the repurchase of Company common stock and expansion of the Company’s business through acquisitions.

8

Non-Performing Assets

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

	Year ended December 31,
	2006			2005			2004			2003			2002
	(In thousands)
Non-accrual loans:
Mortgage loans:
One-to-four family	$	—		$	167		$	—		$	—		$	—
Commercial real estate	90			—			—			—			—
Commercial loans — Eastern	657			—			—			—			—
Indirect automobile loans	153			313			111			49			—
Other consumer loans	—			—			—			1			5
Total non-accrual loans	900			480			111			50			5
Repossessed vehicles	784			493			328			83			—
Repossessed equipment	178			—			—			—			—
Other receivable	97			—			—			—			—
Total non-performing assets	$	1,959		$	973		$	439		$	133		$	5
Restructured loans	$	—		$	—		$	—		$	—		$	—
Allowance for loan losses as a percent of total loans	1.28		%	1.36		%	1.38		%	1.51		%	1.86		%
Non-performing loans as a percent of total loans	0.05			0.03			0.01			—			—
Non-performing assets as a percent of total assets	0.08			0.04			0.03			0.01			—

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 a loan becomes past due 90 days.

Restructured loans represent performing loans for which concessions (such as reductions of interest rates to below market terms and/or extension of repayment terms) are granted due to a borrower’s financial condition.

The increase in non-accrual loans and the existence of repossessed equipment in 2006 resulted from inclusion of Eastern which was acquired in April 2006. The increase in repossessed vehicles over the past four years is due to growth of the automobile loan business.

Allowance for Loan Losses

The allowance for loan losses is management’s estimate of probable known and inherent credit losses in the loan portfolio. The methodology followed to determine the amount of allowance to be recorded in the Company’s financial statements is described in the following paragraphs.

The Company utilizes an internal rating system to monitor and evaluate the credit risk inherent in its loan portfolio. At the time of loan approval, all loans other than indirect automobile loans, Eastern loans, one-to-four family residential mortgage loans, home equity loans and other consumer loans are assigned a rating based on all the factors considered in originating the loan. The initial loan rating is recommended by the loan officer and approved by the individuals or committee responsible for approving the loan. Loan officers are expected to recommend to the Loan Committee changes in loan ratings when facts come to their attention that warrant an upgrade or downgrade in a loan rating.

Problem and potential problem assets (including those in the Eastern loan portfolio) are assigned ratings that coincide with the “Substandard”, “Doubtful” and “Loss” classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve and/or charge-off is not warranted. Assets which do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated “Special Mention”. The Company assigns its fourth lowest rating to loans meeting this designation.

9

On a quarterly basis, management reviews with the Watch Committee the status of each loan assigned one of the Company’s four adverse internal ratings and the judgments made in determining the valuation allowances allocated to such loans. Loans, or portions of loans, classified Loss are either charged off against valuation allowances or a specific allowance is established in an amount equal to the amount classified Loss.

At December 31, 2006, there were loans of $3.5 million classified Special Mention, $5.2 million classified Substandard and $51,000 classified Doubtful. There were specific reserves of $970,000 on such loans. At December 31, 2005, there were loans of $5.5 million classified Special Mention, $2.5 million classified Substandard and $1.3 million classified Doubtful. There were specific reserves of $567,000 on such loans.

The Company’s classification of its loans and the amount of the valuation allowances it sets aside for estimated losses are subject to review by the banking agencies. Based on their reviews, these agencies can order the establishment of additional loss allowances. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on allowances for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of a financial institution’s valuation methodology. Generally, the policy statement recommends that financial institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management establish acceptable valuation processes that meet the objectives set forth in the policy statement. Management has adopted and applied these recommendations in its methodology and procedures for estimating its allowance for loan losses.

The following table sets forth activity in the Company’s allowance for loan losses for the years presented in the table

	Year ended December 31,
	2006			2005			2004			2003			2002
	(In thousands)
Balance at beginning of year	$	22,248		$	17,540		$	16,195		$	15,052		$	15,301
Provision (credit) for loan losses	2,549			2,483			2,603			1,288			(250		)
Allowance obtained through acquisitions	1,959			3,501			—			—			—
Transfer for off-balance sheet loan commitments	(1,286		)	—			—			—			—
Charge-offs:
Indirect automobile loans	2,277			1,803			1,384			186			—
Other consumer loans	7			17			25			38			30
One-to-four family mortgage loan	65			—			—			—			—
Commercial loans — Eastern	638			—			—			—			—
Other commercial loans	38			—			—			—			—
Total charge-offs	3,025			1,820			1,409			224			30
Recoveries:
Mortgage loans:
Multi-family	—			—			—			40			21
Commercial real estate	4			79			7			7			7
Indirect automobile loans	439			445			138			29			—
Other consumer loans	6			20			6			3			3
Commercial loans — Eastern	123			—			—			—			—
Other commercial loans	7			—			—			—			—
Total recoveries	579			544			151			79			31
Net (charge-offs) recoveries	(2,446		)	(1,276		)	(1,258		)	(145		)	1
Balance at end of year	$	23,024		$	22,248		$	17,540		$	16,195		$	15,052

As explained in greater detail in an earlier subsection herein, the provision for loan losses is comprised of amounts relating to the indirect automobile loan portfolio, the Eastern loan portfolio and the remainder of the Company’s loan portfolio.

The provision for loan losses and net charge-offs relating to indirect automobile loans have increased each year as the portfolio has grown. However, the rate of net charge-offs expressed as a percent of the average balance of indirect automobile loans outstanding has remained relatively stable at 0.35% in 2006, 0.32% in 2005 and 0.40% in 2004. Loans delinquent 30 days or more were $7.1 million, or 1.31% of loans outstanding, at the end of 2006 compared to $5.9 million, or 1.28%, at the end of 2005 and $4.5 million, or 1.22%, at the end of 2004.

Since the Company commenced indirect automobile lending in February 2003, it has been the Company’s intent to build up the allowance for loan losses allocated to that portfolio segment. As the portfolio has an average life in the range of two and one-half years and the annualized rate of net charge-offs has been in the range of 0.30% to 0.40%, the Company has sought

10

to achieve an ultimate allowance for loan losses for the indirect automobile loan portfolio equal to 1.00% of loans outstanding. By providing amounts in excess of actual net loan losses, the allowance for loan losses allocated to the indirect automobile loan portfolio expressed as a percent of indirect automobile loans outstanding has increased from 0.38% at the end of 2004 to 0.64% at the end of 2005 and 0.77% at the end of 2006. The total of allowance allocated to indirect automobile loans was $4,176,000 at December 31, 2006 compared to $2,917,000 at December 31, 2005 and $1,416,000 at December 31, 2004.

Only $65,000 of charge-offs has been experienced in the past five years in the Company’s mortgage loan portfolio. The Company believes this favorable experience is attributable to the economy during that time and is not sustainable over normal lending cycles. When the economy is strong, an inherent higher level of risk continues to exist because of the long-term nature of the Company’s mortgage loan portfolio. Mortgage loans tend to have an average life of several years. The higher level of risk in such loans becomes more evident when the economy weakens.

The following tables set forth the Company’s percent of allowance by loan category and the percent of loans to total loans in each of the categories listed at the dates indicated.

	At December 31,
	2006						2005						2004
					Percent						Percent						Percent
					of loans						of loans						of loans
			Percent of		in each				Percent of		in each				Percent of		in each
			allowance		category				allowance		category				allowance		category
			to total		to gross				to total		to gross				to total		to gross
	Amount		allowance		loans		Amount		allowance		loans		Amount		allowance		loans
	(Dollars in thousands)
Mortgage loans:
One-to-four-family	$	860	3.54	%	15.38	%	$	929	4.18	%	16.77	%	$	408	2.33	%	10.32	%
Multi-family	3,311		13.62		17.77		4,747		21.34		22.15		4,808		27.41		25.42
Commercial real estate	6,027		24.79		20.05		5,887		26.46		22.02		5,043		28.75		22.55
Construction and development	752		3.09		2.02		739		3.32		2.10		803		4.58		2.67
Home equity	364		1.50		1.96		429		1.93		2.50		141		0.80		1.07
Second	208		0.86		0.89		287		1.29		1.34		802		4.58		4.06
Commercial loans — Eastern	2,296		9.44		6.83		—		—		—		—		—		—
Other commercial loans	1,968		8.09		5.94		2,147		9.65		6.15		1,337		7.62		5.72
Indirect automobile loans	4,176		17.18		28.98		2,917		13.11		26.79		1,416		8.07		28.01
Other consumer loans	33		0.14		0.18		31		0.14		0.18		24		0.14		0.18
Unallocated	4,315		17.75		—		4,135		18.58		—		2,758		15.72		—
Total	24,310		100.00	%	100.00	%	$	22,248	100.00	%	100.00	%	$	17,540	100.00	%	100.00	%
Less transfer for off-balance sheet loan commitments	1,286
Total allowance for loan losses	$	23,024

	At December 31,
	2003						2002
					Percent						Percent
					of loans						of loans
			Percent of		in each				Percent of		in each
			allowance		category				allowance		category
			to total		to gross				to total		to gross
	Amount		allowance		loans		Amount		allowance		loans
	(Dollars in thousands)
Mortgage loans:
One-to-four-family	$	368	2.27	%	11.00	%	$	403	2.68	%	15.94	%
Multi-family	4,950		30.56		30.53		4,662		30.97		38.50
Commercial real estate	5,333		32.93		28.08		4,842		32.17		33.43
Construction and development	547		3.38		2.23		381		2.53		1.98
Home equity	121		0.75		1.08		108		0.72		1.28
Second	635		3.92		3.92		514		3.41		4.31
Commercial loans — Eastern	—		—		—		—		—		—
Other commercial loans	753		4.65		3.97		616		4.09		4.16
Indirect automobile loans	463		2.86		18.97		—		—		—
Other consumer loans	24		0.15		0.22		34		0.23		0.40
Unallocated	3,001		18.53		—		3,492		23.20		—
Total	$	16,195	100.00	%	100.00	%	$	15,052	100.00	%	100.00	%

11

Historically, the allowance for loan losses has included amounts for unfunded loan commitments. Such amounts were determined by multiplying the reserve factors assigned to each loan segment times the balance of unfunded commitments by loan segment. None of the unfunded commitments at December 31, 2006 were considered to have other than normal credit risk.

Effective December 31, 2006, the allowance related to unfunded loan commitments has been transferred from the allowance for loan losses to a separate liability account. This change, which was made to comply with the requirements of generally accepted accounting principles, had no effect on the consolidated earnings of the Company. This accounting treatment was not followed prior to that date due to immateriality. The amounts transferred would have been $1,263,000 at the end of 2005 and $866,000 at the end of 2004. Information is not readily available to determine what the amounts would have been at the end of 2003 and 2002.

The long-term nature of the Company’s mortgage and commercial loan portfolios as well as the impact of economic changes make it most difficult, if not impossible, to conclude with precision the amount of loss inherent in those loan portfolios at a point in time. In determining the level of the allowance, management evaluates specific credits and the portfolio in general using several methods that include historical performance, collateral values, cash flows and current economic conditions. This evaluation culminates with a judgment on the probability of collection of loans outstanding. Our methodology provides for three allowance components.

The first component represents allowances established for specific identified loans. Specific amounts are allocated on a loan-by-loan basis for any impairment loss as determined by applying one of the three methods cited in generally accepted accounting principles. Based on our experience, it is known that loans in the higher risk categories have inherent loss characteristics that result in their being placed on the Watch List when the economy weakens. Such loss characteristics, which exist throughout the long-term life of the mortgage and commercial loan portfolio, are less obvious in good economic times.

The second component represents allowances for groups of homogenous loans that currently exhibit no identified weaknesses and are evaluated on a collective basis. Allowances for groups of similar loans are established based on factors such as historical loss experience, the level and trend of loan delinquencies, and the level and trend of classified assets.

The third component of the allowance for loan losses is categorized as unallocated. The unallocated part of the allowance is based on an evaluation of factors such as trends in the economy and real estate values in the areas where we lend money, concentrations in the amount of loans we have outstanding to large borrowers and concentration in the type and geographic location of loan collateral. Determination of this portion of the allowance is a very subjective process. Management believes the unallocated allowance is an important component of the total allowance because it addresses the probable inherent risk of loss that exists in that part of the Company’s loan portfolio with repayment terms extended over many years. It also helps to minimize the risk related to the margin of imprecision inherent with the estimation of the allocated components of the allowance. We have not allocated the unallocated portion of the allowance to the major categories of loans because such an allocation would imply a degree of precision that does not exist.

In connection with the second component mentioned above, the reserve factors assigned to the various loan categories have remained unchanged for several years. Upon a recent review of the factors used, we decided to reduce the reserve factor applied to the balance of multi-family mortgage loans from 1.25% to 1.00%. This change was made for the following reasons:

·We have not charged off any multi-family mortgage loans in the past thirteen years.

·Our loan loss experience is not unique. Many of the financial institutions involved in the market segment, both locally and in other metropolitan areas, have likewise reported excellent loss experience.

·The total of multi-family mortgage loans outstanding has been declining due to added competition for such loans. National markets have developed whereby multi-family mortgage loans are combined into pools and sold in a manner similar to mortgage-backed securities comprised of one-to-four family mortgage loans. This market has developed in part because multi-family mortgage loans are considered low risk loans.

·Absent the existence of countervailing factors, the further seasoning of the multi-family mortgage loan portfolio reduces the remaining inherent risk in these loans.

·Demand for multi-family housing remains strong and there appear to be no signs that would suggest deterioration in this lending segment. In fact, some believe the current market for multi-family properties is stronger than it has been for a while because the rapid rise in housing prices in the past few years has made renting a more affordable alternative to a greater number of individuals.

In reviewing reserve factors, we decided not to change the factors assigned to commercial real estate mortgage loans, construction loans and other commercial loans for the following reasons:

12

·Despite excellent loan loss experience in these segments over the past ten years, the degree of risk associated with these loans has not lessened.

·Indeed, especially with respect to construction loans, higher risks exist today than have existed for the last few years. In the past year, the inventory of unsold newly constructed homes has increased dramatically while the prices at which homes have sold have decreased significantly.

·The collectibility of commercial real estate mortgage loans and other commercial loans is highly dependent on the strength of the economy. Currently, there are varying opinions on how the economy will perform in the coming year. In light of current economic uncertainties, it would be unwise to reduce the reserve factors assigned to these segments of the loan portfolio.

As of December 31, 2006, the change in the reserve factor applied to multi-family mortgage loans resulted in an $828,000 reduction in the allowance for loan losses allocated to that portfolio segment. This reduction was the primary reason for the $1,050,000 credit to the provision for loan losses in the fourth quarter of 2006 mentioned previously herein in the subsection “Provision for Loan Losses”.

Prior to January 1, 2005, the Company allocated part of its allowance for loan losses to address the risk associated with the normal lag that exists between the time deterioration might occur in a higher risk loan  (commercial loans and mortgage loans excluding residential and home equity mortgage loans) and when such deterioration becomes known. While this lag represents an additional risk, the Company determined that measurement of that risk is not readily quantifiable and that the amounts previously allocated for such risk were based on somewhat arbitrary assumptions. Accordingly, commencing January 1, 2005, the amount previously allocated for such risk has been included in the unallocated portion of the allowance. Amounts allocated for such risks included in the table above were $1.5 million at December 31, 2004, $1.6 million at December 31, 2003 and $1.4 million at December 31, 2002.

The amount of the unallocated allowance at December 31, 2006 is considered reasonable in light of existing current real estate market and general economic conditions.

Quantitative and Qualitative Disclosure About Market Risk

Market risk is the risk of loss from adverse changes in market prices and/or interest rates. Since net interest income is the Company’s primary source of revenue, interest rate risk is the most significant non-credit related market risk to which the Company is exposed.

The Company’s Asset/Liability Committee, comprised of several members of senior management, is responsible for managing interest rate risk in accordance with policies approved by the Board of Directors regarding acceptable levels of interest rate risk, liquidity and capital. The Committee reviews 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 subsequent changes in interest rates could have on the Company’s future net interest income. The Committee is involved in the planning and budgeting process as well as in the monitoring of pricing for the Company’s loan and deposit products.

The Committee manages interest rate risk through use of both earnings simulation and GAP analysis. Earnings simulation is based on actual cash flows and assumptions of management about future changes in interest rates and levels of activity (loan originations, loan prepayments and deposit flows). The assumptions are inherently uncertain and, therefore, actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and strategies. The net interest income projection resulting from use of actual cash flows and management’s assumptions (“Base Case”) is compared to net interest income projections based on an immediate shift of 200 basis points upward or downward in the first year of the model (“Interest Rate Shock”). The following table indicates the estimated impact on net interest income over a one year period under scenarios of a 200 basis points change upward or downward as a percentage of Base Case earnings projections.

Changes in interest	Estimated percentage change
rates (basis points)	in future net interest income
+200 over one year	(0.89)	%
Base Case	—
-200 over one year	0.37	%

The Company’s interest rate risk policy states that an immediate 200 basis points change upward or downward should not negatively impact estimated net interest income over a one year period by more than 15%.

13

The results shown above are based on the assumption that there are no significant changes in the Company’s operating environment and that short-term interest rates will decrease 25 basis points in the first quarter of 2007 and another 25 basis points in the fourth quarter of 2007. Further, in the case of the 200 basis points downward adjustment, it was assumed that it would not be possible to reduce the rates paid on certain deposit accounts by 200 basis points. Instead, it was assumed that NOW accounts would be reduced by 15 basis points and savings accounts by 135 basis points. There can be no assurance that the assumptions used will be validated in 2007.

GAP analysis measures the difference between the assets and liabilities repricing or maturing within specific time periods. An asset-sensitive position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time horizons, which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling rates. A liability-sensitive position would generally imply a negative impact on net interest income in periods of rising rates and a positive impact in periods of falling rates. GAP analysis has limitations because it cannot measure the effect of interest rate movements and competitive pressures on the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities.

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.

14

The table below shows the Company’s interest rate sensitivity gap position as of December 31, 2006.

	At December 31, 2006
	One year or less			More than one year to two years			More than two years to three years			More than three years to four years			More than four years to five years			More than five years to ten years			More than ten years			Total
	(Dollars in thousands)
Interest-earning assets:(1)
Short-term investments	$	134,417		$	—		$	—		$	—		$	—		$	—		$	—		$	134,417
Weighted average rate	5.20		%	—			—			—			—			—			—			5.20		%
Debt securities (2)	153,639			123,247			25,581			14,109			5,168			8,658			3,971			334,373
Weighted average rate	4.29		%	4.44		%	4.59		%	5.18		%	4.45		%	4.19		%	6.31		%	4.43		%
Mortgage loans (3)	412,330			222,107			140,884			102,467			76,743			74,772			9,505			1,038,808
Weighted average rate	6.96		%	5.82		%	5.80		%	5.72		%	6.42		%	6.11		%	6.58		%	6.33		%
Commercial loans - Eastern (3)	43,521			32,404			21,857			13,920			7,341			8,513			—			127,556
Weighted average rate	11.70		%	11.68		%	11.74		%	11.70		%	11.54		%	11.24		%	—			11.66		%
Indirect automobile loans (3)	204,831			152,730			98,782			54,545			22,852			19,529			—			553,269
Weighted average rate	5.47		%	5.56		%	5.88		%	6.34		%	6.84		%	7.98		%	—			5.80		%
Other loans (3)	44,746			7,205			6,555			5,257			2,965			5,429			—			72,157
Weighted average rate	7.27		%	6.84		%	6.67		%	7.03		%	7.59		%	6.76		%	—			7.13		%
Total interest-earning assets	993,484			537,693			293,659			190,298			115,069			116,901			13,476			2,260,580
Weighted average rate	6.22		%	5.80		%	6.18		%	6.33		%	6.77		%	6.68		%	6.50		%	6.18		%
Interest-bearing liabilities:(1)
NOW accounts	31,494			31,494			31,495			—			—			—			—			94,483
Weighted average rate	0.25		%	0.25		%	0.25		%	—			—			—			—			0.25		%
Savings accounts	33,021			33,021			33,022			—			—			—			—			99,064
Weighted average rate	1.60		%	1.60		%	1.60		%	—			—			—			—			1.60		%
Money market savings accounts	183,098			26,009			—			—			—			—			—			209,107
Weighted average rate	2.84		%	1.78		%	—			—			—			—			—			2.71		%
Retail certificates of deposit (3)	664,171			51,933			9,992			5,801			9,674			—			—			741,571
Weighted average rate	4.83		%	4.55		%	3.44		%	4.85		%	4.85		%	—			—			4.79		%
Brokered certificates of deposit (3)	10,000			41,560			26,500			—			—			—			—			78,060
Weighted average rate	5.35		%	5.39		%	5.38		%	—			—			—			—			5.38		%
Borrowed funds (3)	176,504			137,700			76,000			31,283			14,809			20,566			6,812			463,674
Weighted average rate	4.83		%	4.37		%	5.25		%	4.89		%	5.06		%	4.99		%	5.32		%	4.79		%
Subordinated debt (3)	12,000			—			—			—			—			—			—			12,000
Weighted average rate	8.84		%	—			—			—			—			—			—			8.84		%
Total interest-bearing liabilities	1,110,288			321,717			177,009			37,084			24,483			20,566			6,812			1,697,959
Weighted average rate	4.32		%	3.63		%	3.60		%	4.88		%	4.98		%	4.99		%	5.32		%	4.15		%
Interest sensitivity gap (4)	$	(116,804	)	$	215,976		$	116,650		$	153,214		$	90,586		$	96,335		$	6,664		$	562,621
Cumulative interest sensitivity gap	$	(116,804	)	$	99,172		$	215,822		$	369,036		$	459,622		$	555,957		$	562,621
Cumulative interest sensitivity gap as a percentage of total assets	(4.92		)%	4.18		%	9.09		%	15.55		%	19.37		%	23.43		%	23.71		%
Cumulative interest sensitivity gap as a percentage of total interest-earning assets	(5.17		)%	4.39		%	9.55		%	16.32		%	20.33		%	24.59		%	24.89		%

(1)Interest-earning assets and interest-bearing liabilities are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities.

(2)Debt securities include all debt securities. Unrealized gains and losses on securities, all other marketable equity securities and restricted equity securities are excluded.

(3)For purposes of the gap analysis, the allowance for loan losses, deferred loan fees and costs on loans other than indirect automobile loans, non-performing loans and fair value adjustments are excluded.

(4)Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

Interest rates paid on NOW accounts, savings accounts and money market savings accounts are subject to change at any time and such deposits are immediately withdrawable. A review of rates paid on these deposit categories over the last several years indicated that the amount and timing of rate changes did not coincide with the amount and timing of rate changes on other deposits when the Federal Reserve adjusted its benchmark federal funds rate. Because of this lack of correlation and the unlikelihood that such deposits would be withdrawn immediately, the Company allocates money market savings accounts between the “one year or less” and the “more than one year to two years” columns and NOW accounts and savings accounts equally over those two columns and the “more than two years to three years” column in its gap position table.

15

At December 31, 2006, interest-earning assets maturing or repricing within one year amounted to $994 million and interest-bearing liabilities maturing or repricing within one year amounted to $1.110 billion, resulting in a cumulative one year negative gap position of $117 million, or 4.9% of total assets.  At December 31, 2005, the Company had a cumulative one year negative gap position of $13 million, or 0.6% of total assets. The change in the cumulative one year gap position from the end of 2005 resulted primarily from the shortening of the average duration of retail certificates of deposit.

The Company’s cumulative interest sensitivity gap of assets and liabilities with expected maturities of more than three years changed from approximately $300 million, or 14%, of total assets at December 31, 2005 to $347 million, or 15%, of total assets at December 31, 2006. The change was due primarily to having a significant part of the Company’s growth resulting from loans obtained through the acquisition of Eastern. Those loans have an average life in the range of two to five years.

Other Market Risks. Included in the Company’s investment portfolio at December 31, 2006 were marketable equity securities with a market value of $2.7 million. Included in those amounts were net unrealized gains of $140,000. Movements in the market price of securities may affect the amount of gains or losses ultimately realized by the Company from the sale of its equity securities.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements at December 31, 2006. Periodically, the Bank enters into stand-by letters of credit. The effect of such activity on the Company’s financial condition and results of operations are immaterial.

Contractual Obligations

A summary of contractual obligations at December 31, 2006 by the expected payment period follows.

	Payment due by period
	Less than one year		One to three years		Three to five years		Over five years		Total
	(In thousands)
Borrowed funds from the FHLB	$	176,544	$	213,761	$	46,117	$	27,384	$	463,806
Subordinated debt (1)	5,000		7,000		—		—		12,000
Loan commitments (2)	171,400		—		—		—		171,400
Occupancy lease commitments (3)	1,674		2,698		1,916		1,269		7,557
Service provider contracts (4)	4,673		6,460		3,140		—		14,273
Retirement benefit obligations	22		455		959		8,710		10,146
	$	359,313	$	230,374	$	52,132	$	37,363	$	679,182

(1)Payment due dates represent when the subordinated debt can be paid off at the option of the Company.

(2)These amounts represent commitments made by the Company to extend credit to borrowers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

(3)The leases contain escalation clauses for real estate taxes and other expenditures.

(4)Payments to service providers under most of the existing contracts are based on the volume of accounts served or transactions processed. Some contracts also call for higher required payments when there are increases in the Consumer Price Index. The expected payments shown in this table are based on an estimate of the number of accounts to be served or transactions to be processed, but do not include any projection of the effect of changes in the Consumer Price Index.

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 historic deposit trends and its current pricing strategy for deposits, management believes the Company will retain a large portion of its existing deposit base. While retail deposits grew $42 million, or 4%, in 2006, growth in 2007 will depend on several factors, including the interest rate environment and competitor pricing.

16

The Company obtained $78 million of brokered deposits in 2006 and used the funds primarily to pay off some of the higher rate borrowed funds of Eastern. Brokered deposits are obtained through brokerage firms operating on a national basis. Rates on the funds obtained were in the range of those offered by the FHLB. An attractive feature of brokered deposits is that collateral does not have to be pledged to obtain the funds.

The Company utilizes advances from the FHLB to fund growth and to manage part of the interest rate sensitivity of its assets and liabilities. Generally, borrowings from the FHLB result in more interest expense than would be incurred if growth was funded solely by deposits. Advances outstanding from the FHLB increased from $320 million at the end of 2004 to $412 million at the end of 2005 and $464 million at the end of 2006. The increase in 2005 included $74 million of FHLB advances assumed in the Mystic transaction. At December 31, 2006, the Company had the capacity to borrow an additional $231 million from the FHLB.

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 December 31, 2006, such assets amounted to $228 million, or 9.6% of total assets.

At December 31, 2006, Brookline exceeded all regulatory capital requirements. Brookline’s Tier I capital was $429 million, or 19.4% of adjusted assets. The minimum required Tier I capital ratio is 4.00%.

Recent Accounting Pronouncements

Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”.  In June 2006, the FASB issued FIN 48, an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”, in order to add clarity to the accounting for uncertainty in income taxes recognized in a company’s financial statements. The interpretation requires that only tax positions that are more likely than not to be sustained upon a tax examination are to be recognized in a company’s financial statements to the extent that the benefit is greater than 50% likely of being recognized. The differences that arise between the amounts recognized in the financial statements and the amounts recognized in the tax return will lead to an increase or decrease in current taxes, an increase or decrease to the deferred tax asset or deferred tax liability, respectively, or both. FIN 48 is effective for fiscal years beginning after December 15, 2006 with early application encouraged if interim financial statements have not yet been issued. The Company expects that adoption of FIN 48 will not have a material effect on the Company’s financial position or results of operation.

Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”.  In September 2006, the FASB issued SFAS 157 to provide consistency and comparability in determining fair value measurements and to provide for expanded disclosures about fair value measurements. The definition of fair value maintains the exchange price notion in earlier definitions of fair value but focuses on the exit price of the asset or liability. The exit price is the price that would be received to sell the asset or paid to transfer the liability adjusted for certain inherent risks and restrictions. Expanded disclosures are also required about the use of fair value to measure assets and liabilities. The effective date is for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not believe that adoption of SFAS 157 will have a material impact on the Company’s financial position.

Staff Accounting Bulletin (“SAB”) No. 108.  In September 2006, the SEC issued SAB No. 108 to provide guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 addresses the diversity in practice in quantifying financial statement misstatements and requires companies to quantify the effects of an identified unadjusted error on each financial statement and financial statement disclosure by considering the impact of prior year misstatements on the current year financial statements. Initial application of SAB No. 108 allows companies to elect not to restate prior periods but to reflect the initial application in their annual financial statements covering the first fiscal year ending after November 15, 2006. The cumulative effect of the initial application is to be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year, and the offsetting adjustment, net of tax, is to be made to the opening balance of retained earnings for that year. Companies will need to disclose the nature and amount of each item, when and how each error being corrected arose, and the fact that the errors were previously considered immaterial. Adoption of SAB No. 108 as of December 31, 2006 did not have a material effect on the Company’s financial statements.

17

MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

The management of Brookline Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Brookline Bancorp Inc.’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Brookline Bancorp, Inc.’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, we believe that, as of December 31, 2006, the Company’s internal control over financial reporting is effective based on those criteria.

Brookline Bancorp, Inc.’s independent registered public accounting firm has issued an audit report on our assessment of the Company’s internal control over financial reporting. This report appears on page F-2.

/s/ Richard P. Chapman, Jr.	/s/ Paul R. Bechet
Richard P. Chapman, Jr.	Paul R. Bechet
Chief Executive Officer	Chief Financial Officer

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Brookline Bancorp, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Brookline Bancorp, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Brookline Bancorp, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Brookline Bancorp, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Brookline Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Brookline Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated February 23, 2007 expressed an unqualified opinion on those consolidated financial statements.

/s/KPMG LLP

Boston, Massachusetts
February 23, 2007

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Brookline Bancorp, Inc.:

We have audited the accompanying consolidated balance sheets of Brookline Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brookline Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Brookline Bancorp, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/KPMG LLP

Boston, Massachusetts
February 23, 2007

F-3

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

	December 31,
	2006			2005
ASSETS
Cash and due from banks	$	18,237		$	15,507
Short-term investments	134,417			102,888
Securities available for sale	335,246			374,906
Securities held to maturity (market value of $242 and $423, respectively)	233			410
Restricted equity securities	28,567			23,081
Loans	1,792,062			1,636,755
Allowance for loan losses	(23,024		)	(22,248		)
Net loans	1,769,038			1,614,507
Other investment	—			4,662
Accrued interest receivable	10,310			9,189
Bank premises and equipment, net	9,335			10,010
Deferred tax asset	11,036			11,347
Prepaid income taxes	1,801			—
Goodwill	42,545			35,615
Identified intangible assets, net of accumulated amortization of $4,604 and $2,370, respectively	8,348			9,471
Other assets	3,927			3,111
Total assets	$	2,373,040		$	2,214,704
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	1,210,206		$	1,168,307
Brokered deposits	78,060			—
Borrowed funds	463,806			411,507
Subordinated debt	12,092			12,218
Mortgagors’ escrow accounts	5,114			5,377
Income taxes payable	—			630
Accrued expenses and other liabilities	19,494			14,215
Total liabilities	1,788,772			1,612,254
Minority interest in subsidiary	1,375			—
Stockholders’ equity:
Preferred stock, $0.01 par value; 50,000,000 shares authorized; none issued	—			—
Common stock, $0.01 par value; 200,000,000 shares authorized; 62,989,384 shares issued	630			630
Additional paid-in capital	508,248			512,338
Retained earnings, partially restricted	96,229			121,042
Accumulated other comprehensive loss	(640		)	(1,577		)
Treasury stock, at cost — 1,405,611 shares	(18,144		)	(18,144		)
Unearned compensation - recognition and retention plans	—			(8,103		)
Unallocated common stock held by ESOP — 629,081 shares and 685,161 shares, respectively	(3,430		)	(3,736		)
Total stockholders’ equity	582,893			602,450
Total liabilities and stockholders’ equity	$	2,373,040		$	2,214,704

See accompanying notes to the consolidated financial statements.

F-4

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

	Year ended December 31,
	2006		2005		2004
Interest income:
Loans	$	110,744	$	90,371	$	63,527
Debt securities	14,960		11,121		6,333
Short-term investments	5,338		4,356		1,540
Restricted equity securities	1,484		980		429
Marketable equity securities	124		268		281
Total interest income	132,650		107,096		72,110
Interest expense:
Retail deposits	35,775		23,172		11,708
Brokered deposits	2,663		—		—
Borrowed funds	23,127		15,192		9,416
Subordinated debt	906		686		—
Total interest expense	62,471		39,050		21,124
Net interest income	70,179		68,046		50,986
Provision for loan losses	2,549		2,483		2,603
Net interest income after provision for loan losses	67,630		65,563		48,383
Non-interest income:
Fees and charges	3,264		3,576		2,577
Gains on securities, net	558		853		1,767
Gains on sales of building and other real estate owned	—		322		—
Earnings from equity interest in other investment	1		445		608
Other	27		101		258
Total non-interest income	3,850		5,297		5,210
Non-interest expense:
Compensation and employee benefits	19,305		16,682		13,628
Occupancy	3,225		2,818		1,604
Equipment and data processing	6,017		5,918		4,390
Professional services	1,488		1,321		808
Advertising and marketing	1,019		1,094		638
Merger/conversion	—		894		—
Amortization of identified intangible assets	2,234		2,370		—
Other	3,581		2,860		1,921
Total non-interest expense	36,869		33,957		22,989
Income before income taxes and minority interest	34,611		36,903		30,604
Provision for income taxes	13,614		14,873		12,837
Net income before minority interest	20,997		22,030		17,767
Minority interest in earnings of subsidiary	185		—		—
Net income	$	20,812	$	22,030	$	17,767
Earnings per common share:
Basic	$	0.34	$	0.37	$	0.31
Diluted	0.34		0.36		0.31
Weighted average common shares outstanding during the year:
Basic	60,369,558		60,054,059		57,278,329
Diluted	61,073,491		60,836,211		58,128,232

See accompanying notes to the consolidated financial statements.

F-5

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

	Year ended December 31,
	2006		2005			2004
Net income	$	20,812	$	22,030		$	17,767
Other comprehensive income, net of taxes:
Unrealized securities holding gains (losses)	1,626		(2,516		)	(1,304		)
Income tax expense (benefit)	581		(926		)	(468		)
Net unrealized securities holding gains (losses)	1,045		(1,590		)	(836		)
Less reclassification adjustment for securities gains included in net income:
Realized gains	558		853			1,767
Income tax expense	200		306			634
Net reclassification adjustment	358		547			1,133
Net other comprehensive income (loss) from securities	687		(2,137		)	(1,969		)
Comprehensive income	$	21,499	$	19,893		$	15,798

See accompanying notes to the consolidated financial statements.

F-6

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Year ended December 31, 2006, 2005 and 2004
(Dollars in thousands)

	Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Treasury stock			Unearned compensation- recognition  and retention plans			Unallocated common stock held by ESOP			Total stockholders’ equity
Balance at December 31, 2003	$	602	$	469,493		$	169,417		$	2,529		$	(17,017	)	$	(13,960	)	$	(4,380	)	$	606,684
Net income	—		—			17,767			—			—			—			—			17,767
Other comprehensive loss	—		—			—			(1,969		)	—			—			—			(1,969		)
Common stock dividend of $0.74 per share	—		—			(43,103		)	—			—			—			—			(43,103		)
Exercise of stock options (319,623 shares)	3		1,577			—			—			—			—			—			1,580
Recognition and retention plan shares forfeited	—		(107		)	—			—			—			107			—			—
Compensation under recognition and retention plans	—		—			—			—			—			2,890			—			2,890
Income tax benefit from exercise of non-incentive stock options and dividend payments on unvested recognition and retention plan shares and allocated ESOP shares	—		250			—			—			—			—			—			250
Common stock held by ESOP committed to be released (60,135 shares)	—		586			—			—			—			—			328			914
Balance at December 31, 2004	$	605	$	471,799		$	144,081		$	560		$	(17,017	)	$	(10,963	)	$	(4,052	)	$	585,013

(continued)

F-7

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity (Continued)
Year ended December 31, 2006, 2005 and 2004
(Dollars in thousands)

	Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Treasury stock			Unearned compensation- recognition  and retention plans			Unallocated common stock held by ESOP			Total stockholders’ equity
Balance at December 31, 2004	$	605	$	471,799		$	144,081		$	560		$	(17,017	)	$	(10,963	)	$	(4,052	)	$	585,013
Net income	—		—			22,030			—			—			—			—			22,030
Other comprehensive loss	—		—			—			(2,137		)	—			—			—			(2,137		)
Common stock dividends of $0.74 per share	—		—			(45,069		)	—			—			—			—			(45,069		)
Exercise of stock options (4,520 shares)	—		23			—			—			—			—			—			23
2,516,525 shares issued for the acquisition of Mystic Financial, Inc.	25		39,157			—			—			—			—			—			39,182
Shares obtained through the acquisition of Mystic Financial, Inc. (70,312 shares)	—		—			—			—			(1,127		)	—			—			(1,127		)
Recognition and retention plan shares forfeited	—		(144		)	—			—			—			144			—			—
Compensation under recognition and retention plans	—		—			—			—			—			2,716			—			2,716
Income tax benefit from exercise of non-incentive stock options and dividend payments on unvested recognition and retention plan shares and allocated ESOP shares	—		934			—			—			—			—			—			934
Common stock held by ESOP committed to be released (58,060 shares)	—		569			—			—			—			—			316			885
Balance at December 31, 2005	$	630	$	512,338		$	121,042		$	(1,577	)	$	(18,144	)	$	(8,103	)	$	(3,736	)	$	602,450

(continued)

F-8

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity (Continued)
Year ended December 31, 2006, 2005 and 2004
(Dollars in thousands)

	Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Treasury stock			Unearned compensation- recognition  and retention plans			Unallocated common stock held by ESOP			Total stockholders’ equity
Balance at December 31, 2005	$	630	$	512,338		$	121,042		$	(1,577	)	$	(18,144	)	$	(8,103	)	$	(3,736	)	$	602,450
Net income	—		—			20,812			—			—			—			—			20,812
Other comprehensive income	—		—			—			687			—			—			—			687
Adjustment to initially apply FASB Statement No. 158, net of tax	—		—			—			250			—			—			—			250
Common stock dividends of $0.74 per share	—		—			(44,665		)	—			—			—			—			(44,665		)
Payment of dividend equivalent rights	—		—			(960		)	—			—			—			—			(960		)
Income tax benefit from dividend payments on unexercised stock options and allocated ESOP shares	—		670			—			—			—			—			—			670
Transfer of unearned compensation under the recognition and retention plans to additional paid-in capital	—		(8,103		)	—			—			—			8,103			—			—
Compensation under recognition and retention plans	—		2,858			—			—			—			—			—			2,858
Common stock held by ESOP committed to be released (56,080 shares)	—		485			—			—			—			—			306			791
Balance at December 31, 2006	$	630	$	508,248		$	96,229		$	(640	)	$	(18,144	)	$	—		$	(3,430	)	$	582,893

See accompanying notes to the consolidated financial statements.

F-9

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

	Year ended December 31,
	2006			2005			2004
Cash flows from operating activities:
Net income	$	20,812		$	22,030		$	17,767
Adjustments to reconcile net income to net cash provided from operating activities:
Provision for loan losses	2,549			2,483			2,603
Compensation under recognition and retention plans	2,858			2,716			2,890
Depreciation and amortization of bank premises and equipment	1,452			1,469			726
Amortization, net of accretion, of securities premiums and discounts	(132		)	1,854			3,813
Amortization of deferred loan origination costs, net	8,468			6,247			4,870
Amortization of identified intangible assets	2,234			2,370			—
Net accretion of acquisition fair value adjustments	(1,221		)	(1,702		)	—
Amortization of mortgage servicing rights	16			61			—
Net gains from sales of securities	(558		)	(853		)	(1,767		)
Equity interest in earnings of other investment	(1		)	(445		)	(608		)
Minority interest in earnings of subsidiary	185			—			—
Swap agreement market valuation credit	—			(49		)	(231		)
Write-down of other real estate owned	—			250			—
Income tax benefit from exercise of non-incentive stock options and dividends paid on unvested recognition and retention plan shares and allocated ESOP shares	—			934			250
Gains on sales of building and other real estate owned	—			(322		)	—
Deferred income taxes	(250		)	(2,456		)	(35		)
Release of ESOP shares	791			885			914
(Increase) decrease in:
Accrued interest receivable	(446		)	(1,993		)	(553		)
Prepaid income taxes	(1,801		)	3,365			(270		)
Other assets	575			2,212			(934		)
Increase (decrease) in:
Income taxes payable	(630		)	630			(1,489		)
Accrued expenses and other liabilities	(138		)	2,616			268
Net cash provided from operating activities	34,763			42,302			28,214
Cash flows from investing activities:
Proceeds from sales of securities available for sale	903			9,769			2,132
Proceeds from redemptions and maturities of securities available for sale	230,091			205,928			140,086
Proceeds from redemptions and maturities of securities held to maturity	177			479			453
Purchase of securities available for sale	(189,364		)	(268,701		)	(120,234		)
Purchase of Federal Home Loan Bank of Boston stock	(5,486		)	(1,415		)	(6,043		)
Net increase in loans	(57,612		)	(60,410		)	(203,025		)
Distribution from other investment	—			239			403
Acquisition, net of cash and cash equivalents acquired	(10,603		)	(12,997		)	—
Proceeds from sale of bank premises	—			1,279			—
Proceeds from sale of other real estate owned	—			1,207			—
Proceeds from sales of participations in loans	—			29,713			—
Purchase of bank premises and equipment	(580		)	(1,047		)	(1,889		)
Net cash used for investing activities	(32,474		)	(95,956		)	(188,117		)

(continued)

F-10

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

	Year ended December 31,
	2006			2005			2004
Cash flows from financing activities:
Increase (decrease) in demand deposits and NOW, savings and money market savings accounts	$	(53,163	)	$	(127,179	)	$	29,537
Increase in retail certificates of deposit	95,334			189,984			64,500
Increase in brokered certificates of deposit	78,060			—			—
Proceeds from Federal Home Loan Bank of Boston advances	2,966,500			791,600			632,500
Repayment of Federal Home Loan Bank of Boston advances	(2,914,133		)	(773,906		)	(532,848		)
Repayment of borrowed funds of subsidiary	(95,410		)	—			—
Decrease in mortgagors’ escrow accounts	(263		)	(269		)	(101		)
Income tax benefit from dividend payments on unexercised stock options and allocated ESOP shares	670			—			—
Exercise of stock options	—			23			1,580
Payment of dividends on common stock	(44,665		)	(45,069		)	(43,103		)
Payment of dividend equivalent rights	(960		)	—			—
Net cash provided from financing activities	31,970			35,184			152,065
Net increase (decrease) in cash and cash equivalents	34,259			(18,470		)	(7,838		)
Cash and cash equivalents at beginning of year	118,395			136,865			144,703
Cash and cash equivalents at end of year	$	152,654		$	118,395		$	136,865
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits, borrowed funds and subordinated debt	$	61,631		$	39,450		$	20,904
Income taxes	14,896			12,237			14,380
Acquisition of Mystic Financial, Inc.:
Assets acquired (excluding cash and cash equivalents)	—			$	471,403		—
Liabilities assumed	—			420,351			—
Acquisition of Eastern Funding LLC:
Assets acquired (excluding cash and cash equivalents)	$	111,765		—			—
Liabilities assumed	99,972			—			—
Minority interest in subsidiary	1,190			—			—

See accompanying notes to the consolidated financial statements.

F-11

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, 2005 and 2004

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

Brookline Bancorp. Inc. (the “Company”) is a Delaware chartered savings and loan holding company and the parent of Brookline Bank (“Brookline” or the “Bank”), a federally chartered stock savings institution.

Brookline operates sixteen full service banking offices in Brookline and adjacent communities. The primary activities of Brookline include acceptance of deposits from the general public, origination of mortgage loans on residential and commercial real estate located principally in Massachusetts, origination of commercial loans and indirect automobile loans, origination of loans to finance equipment in the greater metropolitan New York area and selected other locations in the Northeast, and investment in debt and equity securities. The Company is subject to competition from other financial and non-financial institutions and is supervised, examined and regulated by the Office of Thrift Supervision (“OTS”). Brookline’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”).

As a federally-chartered institution, Brookline is required to meet a qualified thrift lender test. Under that test, Brookline must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12-month period. “Portfolio assets” are Brookline’s total assets less the sum of specified liquid assets, goodwill, other intangible assets and property used in the conduct of Brookline’s business. “Qualified thrift investments” include various types of loans and investments related to housing, consumer and certain other purposes. A financial institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. Brookline has met the requirements of the thrift lender test and, at December 31, 2006, 69.0% of its assets were in “qualified thrift investments”.

The accounting and reporting policies of the Company conform to general practices within the banking industry and to accounting principles generally applied in the United States of America. The Company’s critical accounting policies relate to the allowance for loan losses and the evaluation of goodwill and identified intangible assets for impairment. The following is a description of those policies and the Company’s other significant accounting policies.

Principles of Consolidation and Basis of Financial Statement Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Brookline and Brookline Securities Corp. (“BSC”). Brookline includes its wholly-owned subsidiary, BBS Investment Corporation (“BBS”), and its 86.7% owned subsidiary, Eastern Funding LLC (see note 2). BSC and BBS are engaged in buying, selling and holding investment securities. Mystic Financial Capital Trust I and Mystic Financial Capital Trust II are unconsolidated special purpose entities. See note 10 for information about those entities.

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.

Use of Estimates

In preparing these consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses.

Cash Equivalents

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

Securities

Marketable equity securities are classified as available for sale. Debt securities are classified as either held to maturity or available for sale. Management determines the classification of debt securities at the time of purchase.

F-12

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. Those securities held for indefinite periods of time and not intended to be held to maturity are classified as available for sale. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates or other business factors. Securities available for sale are carried at estimated fair value.

Unrealized gains (losses), net of related income taxes, are included in the “accumulated other comprehensive income” component of stockholders’ equity. Restricted equity securities are carried at cost which approximates market value.

Realized gains and losses are determined using the specific identification method. Security valuations are reviewed and evaluated periodically by management. If the decline in the value of any security is deemed to be other than temporary, the security is written down to a new cost basis and the resulting loss is charged to income. Security transactions are recorded on the trade date.

Premiums and Discounts on Debt Securities

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

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

Loans

Loans are reported at the principal amount outstanding, reduced by net deferred loan origination fees and unadvanced funds due mortgagors on uncompleted loans and increased by deferred loan origination costs.

Loan origination fees and direct loan origination costs are deferred, and the net fee or cost is recognized in interest income using the interest method. Deferred amounts are recognized for fixed rate loans over the contractual life of the loans and for adjustable rate loans over the period of time required to adjust the contractual interest rate to a yield approximating a market rate at origination date. Deferred loan origination costs include payments to dealers originating indirect automobile loans. The difference between the rate charged by a dealer to originate an indirect automobile loan and the “buy rate”, or the rate earned by the Company, is referred to as the “spread”. The computed dollar value of the spread paid to a dealer is amortized as a charge to income over the life of the loan. If a loan is prepaid, the unamortized portion of the loan origination costs not subject to rebate from the dealer is charged to income.

Except for indirect automobile loans, accrual of interest on loans is discontinued either when reasonable doubt exists as to the full timely collection of interest and principal or when a loan becomes past due 90 days. Commencing January 1, 2005, this policy also applied to indirect automobile loans past due 90 days. The effect of this change was immaterial to the Company’s consolidated financial statements. All interest previously accrued and not collected is reversed against interest income. Interest payments received on non-accrual and impaired loans are recognized as income unless further collections are doubtful, in which case the payments are applied as a reduction of principal. Loans are generally returned to accrual status when principal and interest payments are current, full collectibility of principal and interest is reasonably assured and a consistent record of performance has been achieved.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect principal or interest due according to the contractual terms of the loan. Impaired loans are measured and reported

F-13

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

based on one of three methods: the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure is less than an impaired loan’s recorded investment, an impairment loss is recognized as part of the allowance for loan losses.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged to earnings. Loans are charged off against the allowance when the collectibility of principal is unlikely. Indirect automobile loans delinquent 120 days are charged off, net of recoverable value, unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. Recoveries of loans previously charged off are credited to the allowance. The allowance for loan losses is management’s estimate of probable known and inherent credit losses in the loan portfolio. In determining the level of the allowance, management evaluates specific credits and the portfolio in general using several methods that include historical performance, collateral values, cash flows and current economic conditions. This evaluation culminates with a judgment on the probability of collection of loans outstanding.

Management’s methodology provides for three allowance components. The first component represents allowances established for specific identified loans. The second component represents allowances for groups of homogenous loans that currently exhibit no identified weaknesses and are evaluated on a collective basis. Allowances for groups of similar loans are established based on factors such as historical loss experience, the level and trends of loan delinquencies, and the level and trends of classified assets. Regarding the indirect automobile loan portfolio, allowances are established over the average life of the loans due to the absence of sufficient historical loss experience. The last component is an unallocated allowance which is based on evaluation of factors such as trends in the economy and real estate values in the areas where the Company lends money, concentrations in the amount of loans the Company has outstanding to large borrowers and concentrations in the type and geographic location of loan collateral. Determination of the unallocated allowance is a very subjective process. Management believes the unallocated allowance is an important component of the total allowance because it (a) addresses the probable inherent risk of loss that exists in the Company’s loan portfolio (a large portion of which is comprised of mortgage loans with repayment terms extended over many years) and (b) helps to minimize the risk related to the imprecision inherent in the estimation of the other two components of the allowance.

Other Investment

Prior to April 13, 2006, the Company had a 28.3% ownership interest in Eastern Funding LLC (“Eastern”). The Company accounted for its investment under the equity method of accounting and included its share of Eastern’s operating results in other income. Upon acquisition of a controlling interest in Eastern, the Company included Eastern’s operating results in its consolidated financial statements. See note 2 for additional information about the acquisition.

Bank Premises and Equipment

Bank premises and equipment are carried at cost less accumulated depreciation and amortization, except for land which is carried at cost. Bank premises and equipment are depreciated using the straight-line method over the estimated useful life of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the improvements.

Goodwill and Identified Intangible Assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is not subject to amortization. Identified intangible assets are assets resulting from acquisitions that are being amortized over their estimated useful lives. The recoverability of goodwill and identified intangible assets is evaluated for impairment at least annually. If impairment is deemed to have occurred, the amount of impairment is charged to expense when identified.

Non-Performing Assets

In addition to non-performing loans, non-performing assets include other real estate owned and repossessed vehicles and equipment. Other real estate owned is comprised of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. Other real estate owned and repossessed vehicles and equipment are recorded initially at estimated fair value less

F-14

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

costs to sell. When such assets are acquired, the excess of the loan balance over the estimated fair value of the asset is charged to the allowance for loan losses. An allowance for losses on other real estate owned is established by a charge to earnings when, upon periodic evaluation by management, further declines in the estimated fair value of properties have occurred. Such evaluations are based on an analysis of individual properties as well as a general assessment of current real estate market conditions. Holding costs and rental income on properties are included in current operations while certain costs to improve such properties are capitalized. Gains and losses from the sale of other real estate owned and repossessed vehicles and equipment are reflected in earnings when realized.

Employee Benefits

Costs related to Brookline’s 401(k) plan, supplemental executive retirement agreements and postretirement benefits are recognized over the vesting period or the related service periods of the participating employees. Effective December 31, 2006, the Company commenced recognition of changes in the funded status of postretirement benefits through comprehensive income in the year in which changes occur. (See note 12).

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

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123-R, “Share-Based Payment” (“SFAS 123-R”), which requires that the grant-date fair value of awarded stock options be expensed over the requisite service period. Adoption of SFAS 123-R had no material effect on the Company’s financial position or results of operations as of and for the year ended December 31, 2006.

Prior to January 1, 2006, the Company measured compensation cost for stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” as the excess, if any, of the fair market value of the Company’s stock at the grant date above the exercise price of options granted. This generally did not result in compensation charges to earnings. Disclosed in the following table are net income and earnings per share, as reported, and pro forma net income and earnings per share as if compensation was measured at the date of grant based on the fair value of the award and recognized over the service period.

	Year ended December 31, 2005						Year ended December 31, 2004
	Basic			Diluted			Basic			Diluted
N Net income as reported	$	22,030		$	22,030		$	17,767		$	17,767
T Total stock-based compensation expense determined using fair value accounting for stock option awards, net of taxes	(805		)	(805		)	(1,235		)	(1,235		)
DiDividends on unvested restricted stock awards	(337		)	(326		)	(430		)	(414		)
PrPro forma net income	$	20,888		$	20,899		$	16,102		$	16,118
E Earnings per share:
A As reported	$	0.37		$	0.36		$	0.31		$	0.31
PrPro forma	0.35			0.34			0.28			0.28

Earnings Per Common Share

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

F-15

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Treasury Stock

Common stock shares repurchased are recorded as treasury stock at cost.

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

Eastern Funding LLC (“Eastern”)

On April 13, 2006, the Company through its wholly-owned subsidiary, Brookline Bank, completed a merger agreement increasing its ownership interest in Eastern from 28.3% to 86.7%. Eastern, which was founded by Michael J. Fanger in 1997, specializes primarily in the financing of coin-operated laundry, dry cleaning and convenience store equipment and businesses in the greater metropolitan New York area and selected other locations in the Northeast. The acquisition of a controlling interest in Eastern enables the Company to originate high yielding loans to small business entities. Mr. Fanger continues to serve as chief executive officer of Eastern and he, along with a family member and two executive officers of Eastern, own the 13.3% minority interest position.

As part of the merger, employment agreements were entered into with Mr. Fanger and the two executive officers who have an ownership interest in Eastern (the “Executives”). The employment agreements are for three years commencing as of the merger date. On each of the first anniversary date and second anniversary date of the merger, the employment agreements can be extended for an additional year such that the remaining term of the employment agreements shall be three years unless the Company provides written notice to the Executive at least sixty days prior to either such anniversary date that his employment agreement will not be extended. The employment agreements provide a base salary that will be subject to annual review by the Compensation Committee of the Company; such base salary can be increased, but not decreased. The Executives are also entitled to an annual incentive bonus, the amounts of which are to be determined based on defined profitability and asset quality benchmarks. The Executives are also entitled to the same benefits offered to full-time employees of the Company. Upon an “Event of Termination”, as defined in the employment agreements, the Executive would be entitled to a severance payment, the amount of which would depend on the facts and circumstances associated with the termination. The maximum amount of such payments equals two times annual base salary and incentive bonus for Mr. Fanger and one times annual base salary and incentive bonus for the two other executives. Non-compete clauses become effective upon termination of an Executive’s employment.

Also as part of the merger, a member agreement was entered into which specifies the conditions under which the Company or the minority interest owners can buy or sell their ownership interests in Eastern, and  how the price of such purchases and sales is to be determined. The minority interest owners may not sell or transfer their interests to anyone other than the Company except for family-related transfers permitted under the merger agreement. During a five year period subsequent to the date of the member agreement, Mr. Fanger is required to purchase additional units of interest in Eastern depending on the magnitude of annual cash distributions of Eastern’s earnings. Mr. Fanger may also make discretionary purchases of additional units of ownership during the five year period subsequent to the date of the member agreement. The per unit price of all required and discretionary purchases by Mr. Fanger is book value as defined in the member agreement. The aggregate purchases made by Mr. Fanger may not increase by more than 5% his percentage of ownership of Eastern as of the merger date.

The purchase was completed through payment of $16,575 in cash, including transaction costs. The transaction was accounted for using the purchase method of accounting, which required that the assets and liabilities of Eastern be recorded at fair value as of the acquisition date to the extent of the ownership interest acquired. The results of operations of Eastern are included in the

F-16

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

Company’s 2006 consolidated statement of income from the date of acquisition. The allocation of the purchase price to the net assets of Eastern and the resulting goodwill are presented below.

Purchase price
Cash paid to holders of Eastern units of ownership							$	14,942
Direct acquisition costs, net of related income tax benefits							1,633
Total purchase price							16,575
Allocation of the purchase price
Assets acquired at historic cost:
Cash and cash equivalents				$	5,972
Loans, net				106,472
Premises and equipment				261
Other assets				2,082
Total assets acquired at historic cost				114,787
Liabilities assumed:
Borrowed funds				95,410
Other liabilities				4,562
Total liabilities assumed				99,972
Net assets at historic cost				14,815
Fair value adjustments:
Loans	$	(427	)
Identified intangible assets	1,110
Net effect of fair value adjustments				683
Net assets at fair value				15,498
Less: Brookline Bancorp, Inc. investment in Eastern				(4,663		)
Minority interest ownership				(1,190		)
Fair value of net assets acquired							9,645
Goodwill resulting from the acquisition							$	6,930

Identified intangible assets included $668 for the estimated value of Eastern’s customer list and $442 for the estimated value of the employment agreements with three executive officers. The values assigned to the customer list and the employment agreements are being amortized over eight years and five years, respectively, on a straight-line basis. Amortization of the identified intangible assets from the date of the acquisition through December 31, 2006 amounted to $129. Amortization expense will be $172 in each of the years in the four year period ending December 31, 2010 and $106 in the year ending December 31, 2011.

Mystic Financial, Inc. (“Mystic”)

On January 7, 2005, the Company acquired all of the outstanding common shares of Mystic, the holding company of Medford Co-operative Bank (“Medford”), which had seven retail banking offices serving customers primarily in Middlesex County in Massachusetts. The acquisition of Mystic provided expanded commercial and retail banking opportunities in that market and enabled the Company to deploy some of its excess capital. As part of the acquisition, Mystic was merged into the Company and

F-17

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

Medford was merged into Brookline. On April 11, 2005, the operating systems of Medford were converted to the operating systems of Brookline.

Under the terms of the transaction agreement, (a) 60% of the shares of Mystic common stock were exchanged for Company common stock based on an exchange ratio of 2.6786 shares of Company common stock for each share of Mystic common stock and (b) 40% of the shares of Mystic common stock were exchanged for cash of $39.00 per share. Cash was paid for fractional shares. The acquisition was accounted for using the purchase method of accounting, which requires that the assets and liabilities of Mystic be recorded at fair value as of the acquisition date. The results of operations of Mystic are included in the 2005 consolidated statement of income from the date of acquisition. Total assets acquired were $483.1 million and total liabilities assumed were $420.4 million. The purchase price to complete the acquisition was $69,075. Goodwill resulting from the acquisition was $35,615. A core deposit intangible asset of $11,841 recognized at the time of the acquisition is being amortized over nine years on an accelerated basis using the sum-of-the-digits method. Amortization of the core deposit intangible in the years ended December 31, 2006 and 2005 amounted to $2,105 and $2,370, respectively. Amortization expense in the next five years ending December 31 will be as follows: $1,842 in 2007, $1,579 in 2008, $1,316 in 2009, $1,053 in 2010 and $789 in 2011.

(3)           Cash and Short-Term Investments (In thousands)

Aggregate reserves (in the form of deposits with the Federal Reserve Bank and vault cash) of $3,833 and $4,482 were maintained to satisfy federal regulatory requirements at December 31, 2006 and 2005, respectively.

Short-term investments are summarized as follows:

	December 31,
	2006		2005
Discount notes issued by U.S. Government-sponsored enterprises	$	99,294	$	63,694
Money market funds	11,335		35,849
Federal funds sold	23,588		3,145
Other deposits	200		200
	$	134,417	$	102,888

Short-term investments are stated at cost which approximates market. Money market funds are invested in mutual funds whose assets are comprised primarily of U.S. Treasury obligations, commercial paper and certificates of deposit with maturities of 90 days or less.

F-18

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

(4)     Investment Securities (In thousands)

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

	December 31, 2006
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
Securities available for sale:
Debt securities:
U.S. Government-sponsored enterprises	$	213,528	$	90	$	247	$	213,371
Municipal obligations	8,660		—		153		8,507
Auction rate municipal obligations	12,650		—		—		12,650
Corporate obligations	6,467		49		6		6,510
Other obligations	500		—		—		500
Collateralized mortgage obligations issued by U.S. Government-sponsored enterprises	52,126		21		176		51,971
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	40,209		7		1,154		39,062
Total debt securities	334,140		167		1,736		332,571
Marketable equity securities	2,535		178		38		2,675
Total securities available for sale	$	336,675	$	345	$	1,774	$	335,246
Securities held to maturity:
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	$	233	$	9	$	—	$	242

	December 31, 2005
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
Securities available for sale:
Debt securities:
U.S. Government-sponsored enterprises	$	295,232	$	—	$	1,716	$	293,516
Municipal obligations	8,671		—		167		8,504
Auction rate municipal obligations	12,750		—		—		12,750
Corporate obligations	7,478		57		15		7,520
Other obligations	500		—		—		500
Collateralized mortgage obligations issued by U.S. Government-sponsored enterprises	211		—		1		210
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	49,681		6		1,324		48,363
Total debt securities	374,523		63		3,223		371,363
Marketable equity securities	2,881		713		51		3,543
Total securities available for sale	$	377,404	$	776	$	3,274	$	374,906
Securities held to maturity:
Other obligations	$	100	$	—	$	—	$	100
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	310		13		—		323
Total securities held to maturity	$	410	$	13	$	—	$	423

F-19

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

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 $38 of mortgage-backed securities at December 31, 2006.

Investment securities at December 31, 2006 and 2005 that have been in a continuous unrealized loss position for less than 12 months or 12 months or longer are as follows:

	December 31, 2006
	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
Debt securities:
U.S. Government-sponsored enterprises	$	60,304	$	90	$	98,303	$	157	$	158,607	$	247
Municipal obligations	—		—		8,507		153		8,507		153
Corporate obligations	—		—		495		6		495		6
Collateralized mortgage obligations	39,551		176		—		—		39,551		176
Mortgage-backed securities	325		2		38,525		1,152		38,850		1,154
Total debt securities	100,180		268		145,830		1,468		246,010		1,736
Marketable equity securities	—		—		253		38		253		38
Total temporarily impaired securities	$	100,180	$	268	$	146,083	1,506		$	246,263	$	1,774

	December 31, 2005
	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
Debt securities:
U.S. Government-sponsored enterprises	$	241,940	$	1,463	$	43,189	$	253	$	285,129	$	1,716
Municipal obligations	1,132		15		7,372		152		8,504		167
Corporate obligations	1,974		15		—		—		1,974		15
Collateralized mortgage obligations	—		—		210		1		210		1
Mortgage-backed securities	18,784		439		29,532		885		48,316		1,324
Total debt securities	263,830		1,932		80,303		1,291		344,133		3,223
Marketable equity securities	2,284		51		—		—		2,284		51
Total temporarily impaired securities	$	266,114	$	1,983	$	80,303	1,291		$	346,417	$	3,274

Management has concluded that the unrealized losses on debt securities are temporary in nature since they relate primarily to acquisition premiums to be amortized over the estimated remaining life of the securities. All principal and interest payments on available-for-sale debt securities in an unrealized loss position at December 31, 2006 are expected to be collected given the high credit quality of the debt issuers and the Company’s ability and intent to hold the securities until such time as their value recovers or they mature. The unrealized loss on marketable equity securities, which relates primarily to common stock of two companies that have continually operated profitably and paid dividends to its stockholders, is immaterial.

F-20

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

The maturities of the investments in debt securities at December 31, 2006 are as follows:

	Available for sale
	Amortized		Estimated
	cost		fair value
Within 1 year	$	125,668	$	125,457
After 1 year through 5 years	162,637		162,071
After 5 years through 10 years	14,866		14,396
Over 10 years	30,969		30,647
	$	334,140	$	332,571

	Held to maturity
	Amortized		Estimated
	cost		fair value
Within 1 year	$	1	$	1
After 1 year through 5 years	37		38
Over 10 years	195		203
	$	233	$	242

Mortgage-backed securities are included above based on their contractual maturities (primarily in 10 years); the remaining lives, however, are expected to be shorter due to anticipated payments. Collateralized mortgage obligations are included above based on when the final principal payment is expected to be received.

Restricted equity securities are as follows:

	December 31,
	2006		2005
Federal Home Loan Bank of Boston stock	$	28,193	$	22,707
Massachusetts Savings Bank Life Insurance Company stock	253		253
Other stock	121		121
	$	28,567	$	23,081

As a voluntary member of the Federal Home Loan Bank of Boston (“FHLB”), the Company is required to invest in stock of the FHLB in an amount equal to 4.5% of its outstanding advances from the FHLB. Stock is purchased at par value. As and when such stock is redeemed, the Company would receive from the FHLB an amount equal to the par value of the stock. At its discretion, the FHLB may declare dividends on the stock. Such dividends amounted to $1,476, $972 and $422 for the years ended December 31, 2006, 2005 and 2004, respectively.

Sales of investment securities are summarized as follows:

	Year ended December 31,
	2006		2005		2004
Sales of marketable equity securities:
Proceeds	$	903	$	1,177	$	2,132
Gross gains	560		856		1,767
Gross losses	2		3		—

F-21

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

(5)     Loans (In thousands)

A summary of loans follows:

	December 31,
	2006			2005
Mortgage loans:
One-to-four family	$	286,623		$	287,450
Multi-family	331,106			379,767
Commercial real estate	373,744			377,462
Construction and development	37,589			36,035
Home equity	36,432			42,924
Second	16,646			22,978
Total mortgage loans	1,082,140			1,146,616
Indirect automobile loans	540,094			459,234
Commercial loans — Eastern	127,275			—
Other commercial loans	110,780			105,384
Other consumer loans	3,322			3,119
Total gross loans	1,863,611			1,714,353
Unadvanced funds on loans	(85,879		)	(88,659		)
Deferred loan origination costs (fees):
Indirect automobile loans	13,175			11,150
Commercial loans — Eastern	991			—
Other	164			(89		)
Total loans	$	1,792,062		$	1,636,755

There were no restructured loans at December 31, 2006 and 2005. Loans on non-accrual at December 31, 2006 and 2005 amounted to $900 and $480, respectively. These amounts include impaired loans of $657 and $167, respectively. Specific reserves of $116 and $67 existed on impaired loans at December 31, 2006 and 2005, respectively. If interest payments on impaired loans had been made in accordance with original loan agreements, interest income of $99, $9 and none would have been recognized on the loans in 2006, 2005 and 2004 compared to interest income actually recognized of $57, none and none, respectively.

A portion of certain commercial real estate loans originated and serviced by the Company are sold periodically to other banks on a non-recourse basis. The balance of loans acquired by other banks amounted to $6,892 and $11,365 at December 31, 2006 and 2005, respectively. No fees are collected by the Company for servicing such loan participations.

In the ordinary course of business, the Company makes loans to its Directors and their related interests, generally at the same prevailing terms as those of other borrowers. A summary of related party activity follows:

	December 31,
	2006			2005
Balance at beginning of year	$	3,132		$	4,087
New loans granted during the year	—			306
Removal of loans no longer to a related party	(102		)	—
Repayments	(181		)	(1,261		)
Balance at end of year	$	2,849		$	3,132

F-22

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

(6)  Allowance for Loan Losses (In thousands)

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

	Year ended December 31,
	2006			2005			2004
Balance at beginning of year	$	22,248		$	17,540		$	16,195
Provision for loan losses	2,549			2,483			2,603
Allowance obtained through acquisitions	1,959			3,501			—
Transfer for off-balance sheet loan commitments	(1,286		)	—			—
Charge-offs	(3,025		)	(1,820		)	(1,409		)
Recoveries	579			544			151
Balance at end of year	$	23,024		$	22,248		$	17,540

At December 31, 2006, a portion of the allowance for credit losses related to unfunded credit commitments was reclassified from the allowance for loan losses to a separate liability account. The liability for unfunded credit commitments included in the allowance for loan losses was $1,263 at December 31, 2005 and $866 at December 31, 2004.

(7)  Bank Premises and Equipment (In thousands)

Bank premises and equipment consist of the following:

	December 31,
	2006		2005
Land	$	62	$	62
Office building and improvements	9,511		9,418
Furniture, fixtures and equipment	5,785		4,211
	15,358		13,691
Accumulated depreciation and amortization	6,023		3,681
	$	9,335	$	10,010

(8)  Deposits (In thousands)

A summary of retail deposits follows:

	December 31, 2006				December 31, 2005
	Amount		Weighted average rate		Amount		Weighted average rate
Demand checking accounts	$	65,926	0.00	%	$	64,705	0.00	%
NOW accounts	94,538		0.25		98,901		0.24
Savings accounts	66,339		0.62		90,424		0.84
Guaranteed savings accounts	32,725		3.61		27,475		2.75
Money market savings accounts	209,107		2.71		240,293		2.12
Total transaction deposit accounts	468,635		1.60		521,798		1.31
Retail certificate of deposit accounts maturing:
Within six months	449,312		4.76		285,349		3.47
After six months but within 1 year	214,859		4.99		226,680		3.63
After 1 year but within 2 years	51,933		4.52		109,485		4.15
After 2 years but within 3 years	9,992		3.96		11,240		3.60
After 3 years but within 4 years	5,801		4.21		4,127		3.73
After 4 years but within 5 years	9,674		4.91		9,628		4.21
Total retail certificate of deposit accounts	741,571		4.80		646,509		3.66
	$	1,210,206	3.56	%	$	1,168,307	2.61	%

F-23

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

Retail certificate of deposit accounts issued in amounts of $100 or more totaled $260,144 and $232,171 at December 31, 2006 and 2005, respectively.

During 2006, the Company obtained deposits through brokerage firms. A summary of those deposits follows.

	December 31, 2006
	Amount		Weighted average rate
Brokered certificate of deposit accounts maturing:
Within six months	$	10,000	5.35	%
After 1 year but within 2 years	41,560		5.39
After 2 years but within 3 years	26,500		5.37
Total brokered certificate of deposit accounts	$	78,060	5.38	%

Interest expense on deposit balances is summarized as follows:

	Year ended December 31,
	2006		2005		2004
Retail deposits:
NOW accounts	$	218	$	213	$	86
Savings accounts	1,804		2,014		1,173
Money market savings accounts	5,335		4,330		3,295
Certificate of deposit accounts	28,418		16,615		7,154
Total retail deposits	$	35,775	$	23,172	$	11,708
Brokered certificates of deposit	$	2,663	$	—	$	—

(9)  Borrowed Funds (In thousands)

Borrowed funds are comprised of the following advances from the FHLB:

	December 31, 2006				December 31, 2005
	Amount		Weighted average rate		Amount		Weighted average rate
Within 1 year	$	176,544	4.83	%	$	166,915	3.92	%
Over 1 year to 2 years	137,732		4.37		64,615		4.09
Over 2 years to 3 years	76,029		5.27		107,732		4.11
Over 3 years to 4 years	31,301		4.91		6,029		4.56
Over 4 years to 5 years	14,816		5.06		31,371		4.90
Over 5 years	27,384		4.97		34,845		4.91
	$	463,806	4.79	%	$	411,507	4.16	%

The advances are secured by a blanket security agreement which requires the Bank to maintain as collateral certain qualifying assets, principally mortgage loans and securities in an aggregate amount equal to outstanding advances.

F-24

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

(10)  Subordinated Debt (Dollars in thousands)

Subordinated debt consists of the following:

	December 31,
	2006		2005
Mystic Financial Capital Trust I (“MFCI”)	$	5,000	$	5,000
Mystic Financial Capital Trust II (“MFCII”)	7,000		7,000
	12,000		12,000
Unamortized premium	92		218
	$	12,092	$	12,218

MFCI and MFCII are unconsolidated special purpose entities that were formed for the purpose of issuing trust preferred securities to the public and investing the proceeds from the sale of the securities in subordinated debentures issued by Mystic. The Company assumed the obligations related to the debentures when it acquired Mystic. Interest paid by the Company on the subordinated debentures equals the dividends paid by MFCI and MFCII to the holders of the trust preferred securities.

Proceeds from the trust preferred securities issued by MFCI were invested in $5,000 of floating rate subordinated debentures that mature in 2032, but are callable at the option of MFCI on April 22, 2007. These debentures represent the sole asset of MFCI. The interest rate on the debentures, which changes semi-annually to 6-month LIBOR plus 3.70%, was 9.09% at December 31, 2006.

Proceeds from the trust preferred securities issued by MFCII were invested in $7,000 of floating rate subordinated debentures that mature in 2033, but are callable at the option of MFCII on April 15, 2008. These debentures represent the sole asset of MFCII. The interest rate on the debentures, which changes quarterly to 3-month LIBOR plus 3.25%, was 8.66% at December 31, 2006.

(11)  Income Taxes (Dollars in thousands)

Income tax expense is comprised of the following amounts:

	Year ended December 31,
	2006			2005			2004
Current provision:
Federal	$	11,422		$	12,512		$	10,204
State	2,263			2,495			2,667
Total current provision	13,685			15,007			12,871
Deferred provision (benefit):
Federal	80			(440		)	(26		)
State	(151		)	306			(8		)
Total deferred benefit	(71		)	(134		)	(34		)
Total provision for income taxes	$	13,614		$	14,873		$	12,837

Total provision for income taxes differed from the amounts computed by applying the statutory U.S. federal income tax rate (35.0%) to income before tax expense as a result of the following:

	Year ended December 31,
	2006			2005			2004
Expected income tax expense at statutory federal tax rate	$	12,114		$	12,916		$	10,711
State taxes, net of federal income tax benefit	1,373			1,821			1,728
Dividend income received deduction	(32		)	(68		)	(71		)
Tax exempt municipal income	(215		)	(126		)	(22		)
Non-deductible portion of ESOP expense	170			199			205
Non-deductible compensation expense	206			130			287
Other, net	(2		)	1			(1		)
	$	13,614		$	14,873		$	12,837
Effective income tax rate	39.3		%	40.3		%	41.9		%

F-25

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at the dates indicated are as follows:

	December 31,
	2006		2005
Deferred tax assets:
Allowance for loan losses	$	10,168	$	9,305
Retirement and postretirement benefits	2,350		2,344
Recognition and retention plans	975		1,026
Unrealized loss on securities available for sale	539		920
Loss carry forward from acquisition	875		1,353
Acquisition fair value adjustments	—		524
Depreciation	52		52
Other	28		289
Total gross deferred tax assets	14,987		15,813
Deferred tax liabilities:
Identified intangible assets	3,157		3,961
Unrecognized gain relating to postretirement obligation	181		—
Savings Bank Life Insurance Company stock	106		106
Deferred loan origination costs	291		283
Capitalized servicing rights	92		99
Acquisition fair value adjustments	75		—
Other	49		17
Total gross deferred tax liabilities	3,951		4,466
Net deferred tax asset	$	11,036	$	11,347

For federal income tax purposes, the Company has a $1,801 reserve for loan losses which remains subject to recapture. If any portion of the reserve is used for purposes other than to absorb the losses for which it was established, approximately 150% of the amount actually used (limited to the amount of the reserve) would be subject to taxation in the year in which used. As the Company intends to use the reserve only to absorb loan losses, no provision has been made for the $753 liability that would result if 100% of the reserve were recaptured.

(12) Employee Benefits (In thousands except share and per share amounts)

Postretirement Benefits

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.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - An Amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires companies to recognize the funded status of defined benefit plans (other than a multiemployer plan) and to recognize any changes in funded status through comprehensive income in the year in which the changes occur. Additionally, SFAS 158 requires companies to measure the funded status of a plan as of the date of their fiscal year end financial statements with limited exceptions. The Company adopted SFAS 158 at December 31, 2006 and, accordingly, reduced the liability for postretirement benefits to the amount of accumulated benefit obligation at that date by transferring $431 ($250 net of taxes) to accumulated other comprehensive income.

F-26

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

The following table provides the components of net periodic postretirement benefit cost.

	Year ended December 31,
	2006			2005			2004
Service cost	$	56		$	154		$	155
Interest cost	45			78			71
Prior service cost	(28		)	(21		)	(21		)
Actuarial gain	17			26			32
Net periodic benefit costs	$	90		$	237		$	237

The reduction in net periodic benefit costs in 2006 was attributable to the subsidy received from the federal Medicare prescription drug program. The discount rate used to determine the actuarial present value of projected postretirement benefit obligations was 5.75% in 2006 and 6.00% in 2005 and 2004.

The assumed health care trend used to measure the accumulated postretirement benefit obligation was 12% initially, decreasing gradually to 5% in 2016 and thereafter. Assumed health care trend rates may have a significant effect on the amounts reported for the postretirement benefit plan. A 1% change in assumed health care cost trend rates would have the following effects:

	1 % Increase		1 % Decrease
Effect on total service and interest cost components of net periodic postretirement benefit costs	$	8	$	(7	)
Effect on the accumulated postretirement benefit obligation	70		(64		)

401(k) Plan

The Company has an employee tax deferred thrift incentive plan under Section 401(k) of the Internal Revenue Code. Each employee reaching the age of twenty one and having completed one thousand hours of service in a plan year is eligible to participate in the plan by making voluntary contributions, subject to certain limits based on federal tax laws. The Company contributes to the plan an amount equal to 5% of the compensation of eligible employees, subject to certain limits based on federal tax laws, but does not match employee contributions to the plan. Expense for the Company plan contributions was $528 in 2006, $428 in 2005 and $251 in 2004.

Supplemental Executive Retirement Agreements

The Company maintains agreements that provide supplemental retirement benefits to certain executive officers. Total expense for benefits payable under the agreements amounted to $367 in 2006, $300 in 2005 and $329 in 2004. Aggregate benefits payable included in accrued expenses and other liabilities at December 31, 2006 and 2005 amounted to $4,722 and $4,355, respectively.

Employee Stock Ownership Plan

The Company maintains an Employee Stock Ownership Plan (“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 December 31, 2006 and 2005, which was $4,002 and $4,252, 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

F-27

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

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.

At December 31, 2006, the ESOP held 629,081 unallocated shares at an aggregate cost of $3,430; the market value of such shares at that date was $8,285. Compensation and employee benefits expense was $791 in 2006, $885 in 2005 and $914 in 2004 based on the commitment to release to eligible employees 56,080 shares in 2006, 58,060 shares in 2005 and 60,135 shares in 2004.

Recognition and Retention Plans

The Company has a recognition and retention plan that has been in place since 1999 (the “1999 RRP”) and another plan that has been in place since 2003 (the “2003 RRP”). Under both of the plans, shares of the Company’s common stock were reserved for issuance as restricted stock awards to officers, employees and non-employee directors of the Company. Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company as treasury shares. Any shares not issued because vesting requirements are not met will again be available for issuance under the plans. Shares awarded vest over varying time periods ranging from six months up to eight years for the 1999 RRP and from less than three months to over five years for the 2003 RRP.  In the event a recipient ceases to maintain continuous service with the Company by reason of normal retirement (only under the 1999 RRP), death or disability, or following a change in control, RRP shares still subject to restriction will vest and be free of such restrictions. Expense for shares awarded is recognized over the vesting period at the fair value of the shares on the date they were awarded.

Total expense for the 1999 RRP was $134 in 2006, $152 in 2005 and $148 in 2004. Total expense for the 2003 RRP was $2,724 in 2006, $2,564 in 2005 and $2,742 in 2004.

As of December 31, 2006, the number of shares available for award under the 1999 RRP and the 2003 RRP were 29,774 shares and 107,600 shares, respectively.

In accordance with SFAS 123-R, effective January 1, 2006, dividends paid on unvested RRP shares are recognized as compensation expense; prior to that date, such dividend payments were charged to retained earnings. Dividends paid on unvested RRP shares were $415 in 2006, $578 in 2005 and $732 in 2004.

Stock Option Plans

The Company has a stock option plan that has been in place since 1999 (the “1999 Option Plan”) and another plan that has been in place since 2003 (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 and 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 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.

Stock options granted under both of the Plans included limited rights and other features (“Limited Rights”) that could require cash settlement of the options on the occurrence of certain circumstances outside the control of the Company. On December 28, 2005, the Compensation Committee of the Board of Directors of the Company voted to amend the Plans to eliminate Limited Rights that grant the holder of options awarded under such Plans the right to receive a cash settlement of any options outstanding in circumstances that are not within the absolute discretion of the Company and to accelerate the vesting of all unvested stock options outstanding on that date granted under the Plans to December 28, 2005. Such options included the following: 20,000 options granted under the 1999 Plan at an exercise price of $12.91 per option, 10,000 of which were to vest on January 16, 2006 and 10,000 on January 16, 2007, and 249,600 options granted under the 2003 Plan

F-28

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

at an exercise price of $15.02 per option, 71,900 of which were to vest each on January 2, 2006, January 2, 2007 and January 2, 2008, and 33,900 on January 2, 2009. If the vesting dates of such options had not been accelerated, to comply with the requirements of SFAS 123-R, non-cash compensation expense of approximately $290,000 in 2006, $202,000 in 2007, $97,000 in 2008 and less than $1,000 in 2009 would have had to be recognized in the Company’s financial statements for those years.

As of December 31, 2006, the number of options available for award under the Company’s 1999 Stock Option Plan and 2003 Stock Option Plan were 245,980 options and 1,137,500 options, respectively.

In accordance with the terms of the Plans, dividend equivalent rights amounting to $960 in 2006, $702 in 2005 and $734 in 2004 were paid to holders of unexercised vested options as a result of the $0.20 per share semi-annual extra dividends paid to stockholders. In accordance with SFAS 123-R, effective January 1, 2006, dividend equivalent rights are charged to retained earnings; prior to that date, such payments were recognized as compensation expense.

Activity under the option plans is as follows:

	Year ended December 31,
	2006		2005			2004
Options outstanding at beginning of year	3,177,988		3,182,508			3,509,631
Options granted at $12.91 per option	5,000		—			—
Options exercised at $4.944 per option	—		(4,520		)	(319,623		)
Options forfeited at $15.02 per option	—		—			(7,500		)
Total options outstanding at end of year	3,182,988		3,177,988			3,182,508
Exercisable as of December 31 at:
$4.944 per share	1,771,568		1,771,568			1,776,088
$11.00 per share	5,393		5,393			5,393
$12.91 per share	45,000		40,000			10,000
$15.02 per share	1,357,500		1,357,500			531,000
$15.42 per share	3,527		3,527			3,527
	3,182,988		3,177,988			2,326,008
Weighted average exercise price per option	$	9.38	$	9.34		$	9.33
Weighted average fair value per option of options granted during the year	$	2.65	$	—		$	—
Weighted average remaining contractual life in years at end of year	4.4		5.3			6.3

To calculate the weighted average data presented above and compensation expense presented in the accompanying financial statements, the fair value of each stock option award was estimated on the date of grant using the Black-Scholes option pricing model with the following valuation assumptions:

	Year ended December 31,
	2006		2005	2004
Dividend yield	3.92	%	—	—
Expected volatility	22.61		—	—
Risk-free interest rate	5.21		—	—
Expected life of options	7 years		—	—

(13) Commitments and Contingencies (In thousands)

Off-Balance Sheet Financial Instruments

The Company is party to off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend

F-29

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts reflect the extent of the involvement the Company has in particular classes of these instruments. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of those instruments. The Company uses the same policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Financial instruments with off-balance sheet risk at the dates indicated follow:

	December 31,
	2006		2005
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans:
One-to-four family mortgage	$	8,572	$	7,422
Multi-family mortgage	8,560		16,815
Commercial real estate mortgage	4,718		3,553
Commercial	12,375		4,515
Unadvanced portion of loans	85,879		88,659
Unused lines of credit:
Equity	47,714		47,649
Other	3,582		4,046

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee by the customer. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower.

Lease Commitments

The Company leases certain office space under various noncancellable operating leases. A summary of future minimum rental payments under such leases at the dates indicated follows:

Year ending December 31
2007	$	1,674
2008	1,535
2009	1,163
2010	1,026
2011	890

The leases contain escalation clauses for real estate taxes and other expenditures. Total rental expense was $1,804 in 2006, $1,518 in 2005 and $1,001 in 2004.

Legal Proceedings

In the normal course of business, there are various outstanding legal proceedings. In the opinion of management, after consulting with legal counsel, the consolidated financial position and results of operations of the Company are not expected to be affected materially by the outcome of such proceedings.

F-30

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

(14) Stockholders’ Equity (In thousands except per share amounts)

Preferred Stock

The Company is authorized to issue 50,000,000 shares of serial preferred stock, par value $0.01 per share, from time to time in one or more series subject to limitations of law, and the Board of Directors is authorized to fix the designations, powers, preferences, limitations and rights of the shares of each such series. As of December 31, 2006, there were no shares of preferred stock issued.

Capital Distributions and Restrictions Thereon

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

Common Stock Repurchases

At December 31, 2006, the Company was authorized to repurchase up to 1,772,532 shares of its common stock. Subsequent authorizations by the Board of Directors of the Company to repurchase additional shares of common stock will not require prior approval or receipt of a non-objection notification from the OTS.

Restricted Retained Earnings

As part of the stock offering in 2002 and as required by regulation, Brookline established a liquidation account for the benefit of eligible account holders and supplemental eligible account holders who maintain their deposit accounts at Brookline after the stock offering. In the unlikely event of a complete liquidation of Brookline (and only in that event), eligible depositors who continue to maintain deposit accounts at Brookline shall 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 $36,512 (unaudited) at December 31, 2006.

(15) Regulatory Capital Requirements (In thousands)

OTS regulations require savings institutions to maintain a minimum ratio of tangible capital to total adjusted assets of 1.5%, a minimum ratio of Tier 1 (core) capital to total adjusted assets of 4.0% and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 8.0%.

Under its prompt corrective action regulations, the OTS is required to take certain supervisory actions with respect to an under-capitalized institution. Such actions could have a direct material effect on the institution’s financial statements. The regulations established a framework for the classification of depository institutions into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Generally, an institution is considered well capitalized if it has a Tier 1 (core) capital ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a Total risk-based capital ratio of at least 10.0%.

F-31

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

The following table reconciles stockholders’ equity under generally accepted accounting principles (“GAAP”) with regulatory capital for the Bank at the dates indicated.

	December 31,
	2006			2005
Stockholders’ equity (GAAP)	$	443,832		$	425,687
Add disallowed unrealized losses on debt securities available for sale	828			1,919
Deduct disallowed identified intangible assets and loan servicing assets	(15,498		)	(9,708		)
Regulatory capital (tangible capital)	429,162			417,898
Add allowance for loan losses equal to 1.25% of adjusted total assets	22,693			20,517
Total risk-based capital	$	451,855		$	438,415

The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OTS about capital components, risk weightings and other factors. These capital requirements apply only to the Bank and do not consider additional capital retained by Brookline Bancorp, Inc.

The following is a summary of the Bank’s actual capital amounts and ratios as of December 31, 2006 and 2005, compared to the OTS requirements for minimum capital adequacy and for classification as a well-capitalized institution:

					OTS requirements
					Minimum capital				Classified as
	Bank actual				adequacy				well capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
At December 31, 2006:
Tangible capital	$	429,162	19.4	%	$	33,194	1.5	%
Tier 1 (core) capital	429,162		19.4		88,518		4.0		$	110,648	5.0	%
Risk-based capital:
Tier 1	429,162		23.6						108,905		6.0
Total	451,855		24.9		145,207		8.0		181,509		10.0
At December 31, 2005:
Tangible capital	$	417,898	20.6	%	$	30,369	1.5	%
Tier 1 (core) capital	417,898		20.6		80,984		4.0		$	101,230	5.0	%
Risk-based capital:
Tier 1	417,898		25.5						98,378		6.0
Total	438,415		26.7		131,170		8.0		163,963		10.0

F-32

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

(16)         Fair Value of Financial Instruments (In thousands)

The following is a summary of the carrying values and estimated fair values of the Company’s significant financial and non-financial instruments as of the dates indicated:

	December 31, 2006				December 31, 2005
	Carrying		Estimated		Carrying		Estimated
	value		fair value		value		fair value
Financial assets:
Cash and due from banks	$	18,237	$	18,237	$	15,507	$	15,507
Short-term investments	134,417		134,417		102,888		102,888
Securities	364,046		364,055		398,397		398,410
Loans, net	1,769,062		1,766,183		1,614,507		1,606,606
Accrued interest receivable	10,310		10,310		9,189		9,189
Financial liabilities:
Demand, NOW, savings and money market savings deposits	468,635		468,635		521,798		521,798
Retail certificates of deposit	741,571		741,559		646,509		645,489
Brokered certificates of deposit	78,060		78,330		—		—
Borrowed funds	463,806		461,325		411,507		408,531
Subordinated debt	12,092		11,998		12,218		11,999

Fair value is defined as the amount for which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. Quoted market prices are used to estimate fair values when those prices are available. However, active markets do not exist for many types of financial instruments. Consequently, fair values for these instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These techniques are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that may appropriately reflect market and credit risks. Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in time, they are susceptible to material near-term changes. The fair values disclosed do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect the possible tax ramifications or estimated transaction costs.

The following is a description of the principal valuation methods used by the Company to estimate the fair values of its financial instruments.

Securities

The fair value of securities is based principally on market prices and dealer quotes. Certain fair values are estimated using pricing models or are based on comparisons to market prices of similar securities. The fair value of stock in the FHLB equals its carrying amount since such stock is only redeemable at its par value.

Loans

The fair value of performing loans is estimated by discounting the contractual cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar quality. For non-performing loans where the credit quality of the borrower has deteriorated significantly, fair values are estimated by discounting cash flows at a rate commensurate with the risk associated with those cash flows.

Deposit Liabilities

The fair values of deposit liabilities with no stated maturity (demand, NOW, savings and money market savings accounts) are equal to the carrying amounts payable on demand. The fair value of retail and brokered certificates of deposit represents contractual cash flows discounted using interest rates currently offered on deposits with similar characteristics and remaining maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of alternative forms of funding (“deposit based intangibles”).

F-33

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

Borrowed Funds and Subordinated Debt

The fair value of borrowings from the FHLB and subordinated debt represents contractual repayments discounted using interest rates currently available for borrowings with similar characteristics and remaining maturities.

Other Financial Assets and Liabilities

Cash and due from banks, short-term investments and accrued interest receivable have fair values which approximate the respective carrying values because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk.

Off-Balance Sheet Financial Instruments

In the course of originating loans and extending credit, the Company will charge fees in exchange for its commitment. While these commitment fees have value, the Company has not estimated their value due to the short-term nature of the underlying commitments and their immateriality.

(17) Condensed Parent Company Financial Statements (In thousands)

Condensed parent company financial statements as of December 31, 2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004 follow. The statement of stockholders’ equity is not presented below as the parent company’s stockholders’ equity is that of the consolidated company.

Balance Sheets

	December 31,
	2006		2005
Assets
Cash and due from banks	$	375	$	253
Short-term investments	6,070		70
Loan to subsidiary bank ESOP	4,002		4,252
Investment in subsidiaries, at equity	545,956		567,612
Other investment	—		4,662
Goodwill	35,615		35,615
Prepaid income taxes	2,164		2,324
Other assets	2,415		2,613
Total assets	$	596,597	$	617,401
Liabilities and Stockholders’ Equity
Subordinated debt	$	12,092	$	12,218
Accrued expenses and other liabilities	1,612		2,733
Stockholders’ equity	582,893		602,450
Total liabilities and stockholders’ equity	$	596,597	$	617,401

F-34

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

Statements of Income

	Year ended December 31,
	2006			2005		2004
Dividend income from subsidiaries	$	10,086		$	21,081	$	18,323
Interest income:
Short-term investments	13			36		5
Loan to subsidiary bank ESOP	353			375		397
Loan to subsidiary bank	—			907		—
Equity interest in earnings of other investment	1			445		608
Total income	10,453			22,844		19,333
Expenses:
Interest on subordinated debt	906			686		—
Directors’ fees	109			156		125
Delaware franchise tax	166			165		167
Professional fees	71			117		88
Other	269			269		180
Total expenses	1,521			1,393		560
Income before income taxes and equity in undistributed net income of subsidiaries	8,932			21,451		18,773
Income tax (benefit) expense	(234		)	497		548
Income before equity in undistributed net income of subsidiaries	9,166			20,954		18,225
Equity in undistributed net income (loss) of subsidiaries	11,646			1,076		(458		)
Net income	$	20,812		$	22,030	$	17,767

F-35

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

Statements of Cash Flows

	Year ended December 31,
	2006			2005			2004
Cash flows from operating activities:
Net income	$	20,812		$	22,030		$	17,767
Adjustments to reconcile net income to net cash provided from operating activities:
Equity in undistributed net (income) loss of subsidiaries	(11,646		)	(1,076		)	458
Equity interest in earnings of other investment	(1		)	(445		)	(608		)
Accretion of acquisition fair value adjustments	(126		)	(119		)	—
Income tax benefit from exercise of non-incentive stock options and dividend payments on unvested recognition and retention plan shares and allocated ESOP shares	—			934			250
(Increase) decrease in prepaid income taxes	160			(894		)	402
(Increase) decrease in other assets	75			928			(610		)
Increase (decrease) in accrued expenses and other liabilities	(330		)	406			222
Net cash provided from operating activities	8,944			21,764			17,881
Cash flows from investing activities:
Investment in subsidiaries	—			(19,044		)	—
Distributions from subsidiaries	39,394			13,909			31,668
Repayment of ESOP loan by subsidiary bank	250			250			250
Loan to subsidiary bank	—			(36,412		)	—
Repayment of loan by subsidiary bank	—			36,412			—
Payment from subsidiary bank for shares vested in recognition and retention plans	2,981			2,753			4,405
Acquisition, net of cash and cash equivalents acquired	—			13,349			—
Dividend distribution from other investment	—			239			403
Net cash provided from investing activities	42,625			11,456			36,726
Cash flows from financing activities:
Payment of dividends on common stock	(46,117		)	(45,603		)	(43,690		)
Income tax benefit from dividend payments on unexercised stock options and allocated ESOP shares	670			—			—
Exercise of stock options	—			23			1,580
Net cash used for financing activities	(45,447		)	(45,580		)	(42,110		)
Net increase (decrease) in cash and cash equivalents	6,122			(12,360		)	12,497
Cash and cash equivalents at beginning of year	323			12,683			186
Cash and cash equivalents at end of year	$	6,445		$	323		$	12,683
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes	$	36		$	220		$	577
Interest on subordinated debt	1,014			779			—

F-36

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2006, 2005 and 2004

(18) Quarterly Results of Operations (Unaudited, dollars in thousands except per share amounts)

	2006 Quarters
	Fourth			Third			Second			First
Interest income	$	35,220		$	35,157		$	33,149		$	29,124
Interest expense	17,532			16,983			15,460			12,496
Net interest income	17,688			18,174			17,689			16,628
Provision for loan losses	129			813			859			748
Net interest income after provision for loan losses	17,559			17,361			16,830			15,880
Gains on securities, net	—			—			—			558
Other non-interest income	902			837			910			642
Amortization of identified intangible assets	(569		)	(569		)	(569		)	(526		)
Other non-interest expense	(8,966		)	(9,063		)	(8,877		)	(7,729		)
Income before income taxes and minority interest	8,926			8,566			8,294			8,825
Provision for income taxes	3,505			3,383			3,298			3,428
Net income before minority interest	5,421			5,183			4,996			5,397
Minority interest in earnings of subsidiary	44			74			67			—
Net income	$	5,377		$	5,109		$	4,929		$	5,397
Earnings per share:
Basic	$	0.09		$	0.08		$	0.08		$	0.09
Diluted	0.09			0.08			0.08			0.09

	2005 Quarters
	Fourth			Third			Second			First
Interest income	$	28,359		$	27,284		$	26,324		$	25,130
Interest expense	11,446			10,335			9,194			8,076
Net interest income	16,913			16,949			17,130			17,054
Provision for loan losses	840			32			957			654
Net interest income after provision for loan losses	16,073			16,917			16,173			16,400
Gains on securities, net	—			—			259			594
Other non-interest income	1,172			928			1,319			1,025
Merger/conversion expense	—			(1		)	(511		)	(382		)
Amortization of core deposit intangible asset	(592		)	(593		)	(593		)	(593		)
Other non-interest expense	(7,440		)	(8,036		)	(7,465		)	(7,751		)
Income before income taxes	9,213			9,215			9,182			9,293
Provision for income taxes	3,677			3,694			3,741			3,761
Net income	$	5,536		$	5,521		$	5,441		$	5,532
Earnings per share:
Basic	$	0.09		$	0.09		$	0.09		$	0.09
Diluted	0.09			0.09			0.09			0.09

Differences between annual amounts and the total of quarterly amounts are due to rounding.

F-37

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Brookline Bancorp, Inc.:

We consent to the incorporation by reference in the registration statements (Nos. 333-80875 and 333-114571) on Forms S-8 of Brookline Bancorp, Inc. of our reports dated February 23, 2007, with respect to the consolidated balance sheets of Brookline Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2006, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006 and the effectiveness of internal control over financial reporting as of December 31, 2006, which reports appear in the December 31, 2006 Annual Report on Form 10-K of Brookline Bancorp, Inc.

/s/ KPMG LLP

Boston, Massachusetts

February 23, 2007

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Richard P. Chapman, Jr., President and Chief Executive Officer, certify that:

1. I have reviewed this Annual Report on Form 10-K of Brookline Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 23, 2007	/s/ Richard P. Chapman, Jr.
Date	Richard P. Chapman, Jr.
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Paul R. Bechet, Chief Financial Officer, certify that:

1.I have reviewed this Annual Report on Form 10-K of Brookline Bancorp, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 23, 2007	/s/ Paul R. Bechet
Date	Paul R. Bechet
	Chief Financial Officer

EX-32.1

Exhibit 32.1

STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002,
18 U.S.C. SECTION 1350

The undersigned, Richard P. Chapman, Jr., is the President and Chief Executive Officer of Brookline Bancorp, Inc. (the “Company”).

This statement is being furnished in connection with the filing by the Company of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “Report”).

By execution of this statement, I certify that:

A)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and

B)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report.

This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.  It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended.

February 23, 2007	/s/ Richard P. Chapman, Jr
Dated	Richard P. Chapman, Jr

EX-32.2

Exhibit 32.2

STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002,
18 U.S.C. SECTION 1350

The undersigned, Paul R. Bechet, is the Chief Financial Officer of Brookline Bancorp, Inc. (the “Company”).

This statement is being furnished in connection with the filing by the Company of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “Report”).

By execution of this statement, I certify that:

A)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and

B)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report.

This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.  It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended.

February 23, 2007		/s/	Paul R. Bechet
	Dated	Paul R. Bechet