10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934,
	for the Fiscal Year Ended December 31, 2008,
	or
o	TRANSITION 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 (§ 229.405 of this chapter) 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, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12-b of the Exchange Act (Check one): .

Large accelerated filer  x Accelerated filer  o Non-accelerated filer  o Smaller reporting company  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 26, 2009 was 57,850,448 for an aggregate market value of $506.8 million. This excludes 522,761 shares held by Brookline Bank Employee Stock Ownership Plan and Trust.

At February 26, 2009, the number of shares of common stock, par value $0.01 per share, issued and outstanding were 63,746,942 and 58,373,209, respectively.

DOCUMENTS INCORPORATED BY REFERENCE

1.  Sections of the Annual Report to Stockholders for the year ended December 31, 2008 (Part I and Part II)

2.  Proxy Statement for the Annual Meeting of Stockholders dated March 30, 2009 (Part III)

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

FORM 10-K

Index

		Page
Part I
Item 1.	Business	1 - 22
Item 1A.	Risk Factors	22
Item 1B.	Unresolved Staff Comments	23
Item 2.	Properties	23
Item 3.	Legal Proceedings	23
Item 4.	Submission of Matters to a Vote of Security Holders	24
Part II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24
Item 6.	Selected Consolidated Financial Data	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 8.	Financial Statements and Supplementary Data	25
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	25
Item 9A.	Controls and Procedures	25
Item 9B.	Other Information	25
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	25
Item 11.	Executive Compensation	26
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	26
Item 13.	Certain Relationships and Related Transactions, and Director Independence	26
Item 14.	Principal Accountant Fees and Services	26
Part IV
Item 15.	Exhibits and Financial Statement Schedules	27
Signatures		29

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, which provides a “safe harbor” for forward-looking statements made by or on behalf of the Company.

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

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

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. The Company is a Delaware corporation and the holding company parent of the Bank.

On January 7, 2005, the Company completed the acquisition of Mystic Financial, Inc. (“Mystic”) for approximately $69.1 million. Total assets acquired were $483 million and liabilities assumed were $420 million, including $332 million of deposits.

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 provided expanded commercial and retail banking opportunities in that market and enabled the Company to deploy some of its excess capital.

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 throughout the United States of America. The acquisition has enabled the Company to originate high yielding loans to small business entities. For additional information about the acquisition, see note 2 of the Notes to Consolidated Financial Statements in the Company’s 2008 Annual Report to Stockholders, which is incorporated herein by reference.

Market Area and Credit Risk Concentration

As of December 31, 2008, Brookline operated eighteen 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

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noted, however, that Massachusetts has had rising unemployment as a result of a weakening economy. 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. 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.

Brookline’s urban and suburban market also includes a significant number of one-to-four family residential properties. As a result, the origination of one-to-four family residential mortgage loans has been an important part of Brookline’s lending activities. For several years, market value prices for residential properties rose significantly, but in 2007 and 2008, there was a noticeable decline in market prices for residential properties. It is the view of several economists that home prices will continue to decline over the next few years. While, historically, Brookline has not experienced significant losses from residential mortgage lending, declining home prices could result in a rise in delinquencies and foreclosures, ultimately culminating in loan losses. To mitigate the potential for such losses, Brookline has consistently applied conservative underwriting criteria in originating residential mortgage loans and financing construction of residential properties. Construction lending has not been a significant part of Brookline’s lending activities.

In the first quarter of 2003, we 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, our loan portfolio is not classified as “subprime lending”. Most of our loans are originated through automobile dealerships in Massachusetts, Connecticut, Rhode Island and New Hampshire. Due to rising delinquencies and charge-offs, as well as deteriorating trends in the economy and the auto industry, we took steps in the second half of 2007 and thereafter to tighten our underwriting criteria. As auto industry sales plummet in a weakening economic environment, we expect the volume of loan originations to decline in 2009.

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 the greater New York metropolitan area and elsewhere throughout the United States of America. 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 of America. 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 residential mortgage loans and 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’s net interest margin is greatly influenced by interest rates established by the Federal Open Market Committee of the Federal Reserve System. In the past few 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 and back to an upward slope. Improvement in net interest margin will continue to be difficult to achieve until the slope of the yield curve is upward for an extended period of time.

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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.

Intense competition for loans and deposits over the past few years caused our profit margin to erode from historic levels. In 2008, the weakening economy resulted in higher loan losses and earnings contraction at many financial institutions, including our Company. To recover some of the decline in earnings, financial institutions appear to have recently become more rational in their loan and deposit pricing. Insufficient time has elapsed to judge whether the improvement in loan and deposit pricing is a temporary phenomenon or will last for some extended time.

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, 2008, the Company was in compliance with this policy limit.

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, the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Government National Mortgage Association (“GNMA”) 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 (excluding short-term investments, collateralized mortgage obligations and mortgage-backed 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 stockholders’ 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 enterprises is not to exceed 75% of the Company’s stockholders’ equity and the amount invested in discount notes issued by U.S. Government-sponsored enterprises 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 2007, 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 thirty month 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. As U.S. Government-sponsored enterprises experienced rising losses and capital erosion in 2008, especially FNMA and Freddie Mac, we decided to stop purchasing debt securities issued by them. As a result, the aggregate carrying value of debt securities issued by U.S. Government-sponsored enterprises (excluding short-term investments, collateralized mortgage obligations and mortgage-backed securities) was reduced from $80.9 million at December 31, 2007 to $3.1 million at December 31, 2008. At both of those dates, 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

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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, 2008, corporate obligations owned by the Company included two pools of trust preferred securities issued by a number of financial institutions and insurance companies with an aggregate carrying value of $1,245,000 and an aggregate estimated fair value of $1,011,000 and debt obligations and trust preferred securities issued by financial institutions with an aggregate carrying value of $3,349,000 and an aggregate estimated fair value of $2,417,000. For further information about the carrying value and estimated fair value of these investments, see pages 9 through 11 of the Management Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2008 Annual Report to Stockholders, which is incorporated herein by reference.

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 FNMA, Freddie Mac and GNMA who pool and resell participation interests in the form of securities to investors and guarantee the payment of principal and interest to the investors. On an infrequent basis, the Company purchases mortgage related securities that are not issued by U.S. Government-sponsored enterprises. Such purchases are usually made for community reinvestment act (“CRA”) purposes and are not of significance in relation to the Company’s entire investment securities portfolio. 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 issued and guaranteed by U.S. Government-sponsored enterprises 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

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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 by 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, 2008, mortgage related securities in the portfolio had net aggregate unamortized premiums of $316,000.

The Company’s investment in mortgage securities increased from $91.3 million at December 31, 2006 to $176.6 million at December 31, 2007 and $279.5 million at December 31, 2008. The securities acquired in 2007 and 2008 were purchased mostly because of their higher yield in relation to other investment possibilities within the Company’s risk parameters and their guarantee by the issuing U.S. Government-sponsored enterprises.

Municipal Obligations and Auction Rate Municipal Obligations

The total of municipal obligations owned by the Company was $752,000 at December 31, 2008 compared to $4.5 million at December 31, 2007. The one remaining municipal obligation at December 31, 2008 matures on August 1, 2014 and was rated “AAA” by two rating firms at that date.

The Company also owned auction rate municipal obligations amounting to $4.5 million at December 31, 2008 and $13.1 million at December 31, 2007. The reduction in 2008 resulted from a combination of payments received from debt issuers who called certain obligations, proceeds from sales, all of which were at face value and resulted in no losses, and a $683,000 reduction in the fair value of the obligations. The debt securities were issued by municipal, county and state entities, but are not debt obligations of those issuing government entities. The sources of funds to repay the debt securities generally are revenues from hospitals, transportation systems, student education loans and property taxes. These obligations are variable rate securities with long-term maturities whose interest rates are set periodically through an auction process. The auction rate period for the obligations typically ranges from 7 days to 35 days.

The auction rate municipal obligations owned by the Company were rated “AAA” at the time of acquisition due, in part, to the guarantee of third party insurers. In the 2008 first quarter, public disclosures indicated that certain third party insurers were experiencing financial difficulties and, therefore, might not be able to meet their guarantee obligations should issuers fail to pay their contractual obligations. As a result, auctions relating to obligations owned by us and others failed to attract a sufficient number of investors. Auction failures continued through 2008.

Full collectibility of the municipal obligations owned by us has never been a concern. None of the issuers has defaulted on scheduled payments, the financial condition of the issuers is considered sound and we have the ability and intent to hold the debt obligations for a period of time to recover our investment in total.

Marketable Equity Securities

It is the Company’s policy to limit the aggregate cost of marketable equity securities issued by one company that it owns 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.

At December 31, 2008, the Company owned marketable equity securities with a market value of $1.2 million, including net unrealized losses of $324,000. The securities include perpetual preferred stock issued by FNMA with a market value of $40,000, perpetual preferred stock issued by Merrill Lynch & Co., Inc. with a market value of $647,000 and stocks of banks and utility companies with an aggregate market value of $489,000.

Restricted Equity Securities

At December 31, 2008, restricted equity securities owned by the Company included stock in the Federal Home Loan Bank of Boston (“FHLB”) with a carrying value of $36.0 million and stock in two other entities with a carrying value of $374,000. As of September 30, 2008, the FHLB reported that it had an unrealized loss of approximately $1.3 billion relating to private-label mortgage-backed securities it owned. If this unrealized loss were deemed by FHLB to be an other-than-temporary impairment loss in the future, it could exceed the FHLB’s retained earnings and possibly put into question whether the fair value of FHLB stock owned by the Company was less than its carrying value. The Company will continue

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to monitor its investment in FHLB stock.

Other Information About Investment Securities

See pages 4 and 9 through 11 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2008 Annual Report to Stockholders, which is incorporated herein by reference, for additional information about the Company’s investment securities portfolio.

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

	At December 31,
	2008				2007				2006
	Amount		Percent of total		Amount		Percent of total		Amount		Percent of total
	(Dollars in thousands)
Debt securities:
U.S. Government-sponsored enterprises	$	3,089	0.94	%	$	80,904	25.90	%	$	213,371	58.61	%
Municipal obligations	752		0.23		4,513		1.44		8,507		2.34
Auction rate municipal obligations	4,517		1.37		13,050		4.18		12,650		3.47
Corporate obligations	3,428		1.04		4,578		1.47		6,510		1.79
Other obligations	—		—		500		0.16		500		0.14
Collateralized mortgage obligations issued by U.S. Government-sponsored enterprises	101,633		30.91		129,551		41.47		51,971		14.28
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	177,904		54.10		47,093		15.07		39,295		10.79
Total debt securities	291,323		88.59		280,189		89.69		332,804		91.42
Other marketable equity securities	1,177		0.36		4,051		1.30		2,675		0.73
Restricted equity securities	36,335		11.05		28,143		9.01		28,567		7.85
Total investment securities	$	328,835	100.00	%	$	312,383	100.00	%	$	364,046	100.00	%
Debt and equity securities available for sale	$	292,339	88.90	%	$	284,051	90.93	%	$	335,246	92.09	%
Debt securities held to maturity	161		0.05		189		0.06		233		0.06
Restricted equity securities	36,335		11.05		28,143		9.01		28,567		7.85
Total investment securities	$	328,835	100.00	%	$	312,383	100.00	%	$	364,046	100.00	%

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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,
	2008				2007					2006
	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	$	3,003	$	3,089	$	80,621		$	80,904	$	213,528		$	213,371
Municipal obligations	750		752		4,531			4,513		8,660			8,507
Auction rate municipal obligations	5,200		4,517		13,050			13,050		12,650			12,650
Corporate obligations	4,594		3,428		4,779			4,578		6,467			6,510
Other obligations	—		—		500			500		500			500
Collateralized mortgage obligations issued by U.S. Government-sponsored enterprises	100,614		101,633		129,137			129,551		52,126			51,971
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	174,884		177,743		47,182			46,904		40,209			39,062
Total debt securities	289,045		291,162		279,800			280,000		334,140			332,571
Marketable equity securities	1,501		1,177		4,464			4,051		2,535			2,675
Total securities available for sale	290,546		292,339		284,264			284,051		336,675			335,246
Net unrealized gains (losses) on securities available for sale	1,793		—		(213		)	—		(1,429		)	—
Total securities available for sale, net	$	292,339	$	292,339	$	284,051		$	284,051	$	335,246		$	335,246
Securities held to maturity:
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	$	161	$	171	$	189		$	199	$	233		$	242
Total securities held to maturity	$	161	$	171	$	189		$	199	$	233		$	242
Restricted equity securities:
Federal Home Loan Bank of Boston stock	$	35,961			$	27,769				$	28,193
Massachusetts Savings Bank Life Insurance Company stock	253				253					253
Other stock	121				121					121
Total restricted equity securities	$	36,335			$	28,143				$	28,567

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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, 2008
	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	$	—	—	%	$	3,089	2.80	%	$	—	—		$	—	—	%	$	3,089	2.80	%
Municipal obligations (1)	—		—		—		—		752		5.46	%	—		—		752		5.46
Auction rate municipal obligations (2)	—		—		—		—		—		—		4,517		1.92		4,517		1.92
Corporate obligations	—		—		—		—		—		—		3,428		5.76		3,428		5.76
Collateralized mortgage obligations	—		—		1,424		5.35	%	31,271		5.33		68,938		5.87		101,633		5.70
Mortgage-backed securities	586		4.00		52,539		3.93		104,195		4.18		20,423		4.20		177,743		4.11
Total debt securities	586		4.00		57,052		3.90		136,218		4.45		97,306		5.33		291,162		4.64
Other marketable equity securities (1)																	1,177		10.71
Total securities available for sale																	292,339		4.66
Securities held to maturity:
Mortgage-backed securities	2		9.42		1		9.00		—		—		158		7.30		161		7.34
Restricted equity securities:
Federal Home Loan Bank of Boston stock																	35,961		1.75
Massachusetts Savings Bank Life Insurance Company stock (1)																	253		4.57
Other stock																	121		—
Total restricted equity securities (1)																	36,335		1.76
Total securities	$	588	4.02	%	$	57,053	3.90	%	$	136,218	4.45	%	$	97,464	5.34	%	$	328,835	4.34	%

(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 were scheduled to occur on these obligations within 35 days after December 31, 2008.

8

150

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,
	2008					2007					2006						2005					2004
				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	$	362,722		16.41	%	$	296,329		14.90	%	$	286,623			15.38	%	$	287,450		16.77	%	$	135,995			10.32	%
Multi-family	338,677			15.33		330,925			16.64		331,106				17.77		379,767			22.15		334,884				25.42
Commercial real estate	474,847			21.49		381,300			19.17		373,744				20.05		377,462			22.02		297,014				22.55
Construction and development	37,193			1.68		26,807			1.35		37,589				2.02		36,035			2.10		35,237				2.67
Home equity	42,118			1.91		35,110			1.77		36,432				1.96		42,924			2.50		14,066				1.07
Second	26,717			1.21		23,878			1.20		16,646				0.89		22,978			1.34		53,499				4.06
Total mortgage loans	1,282,274			58.03		1,094,349			55.03		1,082,140				58.07		1,146,616			66.88		870,695				66.09
Indirect automobile loans	597,230			27.03		594,332			29.88		540,094				28.98		459,234			26.79		368,962				28.01
Commercial loans - Eastern	147,427			6.67		141,675			7.12		127,275				6.83		—			—		—				—
Other commercial loans	178,887			8.09		154,442			7.77		110,780				5.94		105,384			6.15		75,349				5.72
Other consumer loans	3,979			0.18		3,909			0.20		3,322				0.18		3,119			0.18		2,406				0.18
Total gross loans	2,209,797			100.00	%	1,988,707			100.00	%	1,863,611				100.00	%	1,714,353			100.00	%	1,317,412				100.00	%
Less:
Unadvanced funds on loans	(121,709		)			(114,651		)			(85,879		)				(88,659		)			(57,205		)
Deferred loan origination costs (fees):
Indirect automobile  loans	15,349					15,445					13,175						11,150					9,732
Commercial loans - Eastern	752					824					991						—					—
Other consumer loans	1,362					571					164						(89		)			(302		)
Total loans, net	$	2,105,551				$	1,890,896				$	1,792,062					$	1,636,755				$	1,269,637

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, loans made by Eastern to finance equipment used by small businesses, loans to condominium associations and business entities, including commercial lines of credit. The Company also provides financing for construction and development projects, 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 unless approved by the Executive Committee of the Board of Directors. At December 31, 2008, two borrowers each had aggregate loans outstanding in excess of $25.0 million ($25.6 million and $25.4 million) that were approved by the Executive Committee of the Board of Directors. Including those borrowers, there were 48 borrowers each with aggregate loans outstanding of $5.0 million or greater at December 31, 2008. The cumulative total of those loans was $457.1 million, or 28.3% of loans outstanding (excluding indirect automobile loans). Most of this cumulative amount is comprised of multi-family and commercial real estate mortgage loans and other commercial 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.

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

9

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 increased from $331 million at December 31, 2006 and December 31, 2007 to $339 million at December 31, 2008. Commercial real estate mortgage loans increased from $374 million at December 31, 2006 to $381 million at December 31, 2007 and $475 million at December 31, 2008. Competition for multi-family and commercial real estate mortgage loans, which had been intense for a few years, began to ease in the latter part of 2007. Loan pricing, which had been especially aggressive, started to improve. With that improvement, we become more active in originating loans in those lending segments.

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. One-to-four family mortgage loans increased from $287 million at the end of 2006 to $296 million at the end of 2007 and $363 million at the end of 2008.

Construction and Development Loans

At December 31, 2008, construction and development loans amounted to $37.2 million, $7.0 million of which had not been advanced as of that date. The $30.2 million was comprised of $10.2 million pertaining to construction of multi-family properties, $14.6 million pertaining to construction of commercial properties and $5.4 million pertaining to construction of one-to-four family residential homes. Criteria applied in underwriting construction loans for which the primary source of repayment is the sale of the property are different from the criteria applied 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 $147 million at December 31, 2008, $142 million at December 31, 2007 and $127 million at December 31, 2006. 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 of America. 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 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.

10

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 amounted to $179 million at December 31, 2008 compared to $154 million at December 31, 2007 and $111 million at December 31, 2006. Included in those amounts were loans to condominium associations of $66 million, $57 million and $62 million, respectively. Typically, loans to condominium associations are for the purpose of funding capital improvements, are made for five to ten year terms and are secured by a general assignment of condominium association revenues. 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 provides commercial banking services to companies in its market area. Product offerings include lines of credit, term loans, letters of credit, deposit services and cash management. These types of credit facilities have as their primary source of repayment cash flows from the operations of a business. Interest rates offered are available on a floating basis tied to the prime rate or a similar index or on a fixed rate basis referenced on the FHLB index.

Credit extensions are made to established businesses on the basis of an analysis of their financial statements, the nature of collateral to secure the credit extension and in most instances the personal guarantee of the owner of the business. We also participate in U.S. Government programs such the Small Business Administration in both the 7A program and as a SBA preferred lender.

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 in a measured way by focusing on credit fundamentals and service to established businesses.

Commercial business loans increased from $49 million at December 31, 2006 to $97 million at December 31, 2007 and $113 million at December 31, 2008. Included in the total at the end of 2008 is $12.8 million in standby letters of credit.

Indirect Automobile (“Auto”) Loans

Auto loans amounted to $597 millionat December 31, 2008 compared to $594 millionat December 31, 2007 and $540 million at December 31, 2006. The loans are for the purchase of automobiles (both new and used) and light duty trucks primarily to individuals, but also to corporations and other organizations.

The loans are originated through dealerships and assigned to the Company. The vice president responsible for auto lending must approve the application of any dealer with whom the Company does business. The Company does business with approximately 200 dealerships located primarily in Massachusetts, Connecticut, Rhode Island 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 application processing system statistically grades each application according to score ranges. Depending on the data received, an application is either approved or denied 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 ranges. Regarding loan to value ratios, the Company considers auto loans to be essentially credits that are only partially collateralized. When borrowers cease to make required payments, repossession and sale of the vehicle

11

financed usually results in insufficient funds to fully pay the remaining loan balance.

The Company’s auto loan policy limits the aggregate amount of loans with credit scores of less than 660 to 15% of loans outstanding. At December 31, 2008, loans with credit scores below 660 were approximately 9% of loans outstanding. The average-dollar weighted credit score of loans in the portfolio at that date was 737. Due to rising delinquencies and net charge-offs in the second half of 2007, underwriting was tightened in September 2007 by limiting the amount of loans originated to borrowers with scores of less than 660 in any month to no more than 10%. Also, effective July 1, 2008, the Company curtailed dealer accommodation loans due to the higher risk normally associated with such loans. Loans originated to borrowers with credit scores below 660 declined from $44 million, or 13.7% of loans originated in 2006, to $40 million, or 11.8% of loans originated in 2007, and $15 million, or 5.1% of loans originated in 2008. The average credit scores of loans originated in 2008 and 2007 were 751 and 728, respectively.

Auto 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 90 days of the loan origination date, the dealer must pay the remainder of unamortized 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, 2008. The table does not include projected prepayments or scheduled principal amortization.

	At December 31, 2008
	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	$	61,572	$	195,690	$	23,134	$	51,402	$	3,446	$	61,886	$	10,585	$	3,887	$	411,602
After one year:
More than one year to three years	92,012		146,534		—		1,287		30,462		10,567		116,299		44		397,205
More than three years to five years	115,724		231,549		2,600		3,295		48,229		16,237		302,637		46		720,317
More than five years to ten years	75,299		177,904		4,487		1,465		59,398		26,475		167,709		—		512,737
More than ten years	17,868		22,040		—		434		5,714		—		—		—		46,056
Total due after one year	300,903		578,027		7,087		6,481		143,803		53,279		586,645		90		1,676,315
Total amount due	$	362,475	$	773,717	$	30,221	$	57,883	$	147,249	$	115,165	$	597,230	$	3,977	2,087,917
Add (deduct):
Deferred loan origination costs:
Indirect automobile loans																	15,349
Other loans																	2,114
Acquisition fair value adjustments																	171
Net loans																	$	2,105,551

12

The following table sets forth at December 31, 2008 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	$	37,469	$	263,434	$	300,903
Multi-family and commercial real estate	282,700		295,327		578,027
Construction and development	2,600		4,487		7,087
Home equity and second mortgage	3,360		3,121		6,481
Total mortgage loans	326,129		566,369		892,498
Commercial loans - Eastern	143,803		—		143,803
Other commercial loans	37,280		15,999		53,279
Indirect automobile loans	586,645		—		586,645
Other consumer loans	90		—		90
Total loans	$	1,093,947	$	582,368	$	1,676,315

Non-Performing Assets and Allowance for Loan Losses

For information about the Company’s non-performing assets and allowance for loan losses, see pages 13 through 17 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2008 Annual Report to Stockholders, which is incorporated herein by reference.

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. 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,
	2008		2007			2006
	(Dollars in thousands)
Net retail deposits	$	38,062	$	(4,915	)	$	6,124
Interest credited on retail deposit accounts	39,445		45,046			35,775
Total increase in retail deposit accounts	$	77,507	$	40,131		$	41,899

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

In 2007, transaction deposit accounts decreased $14.7 million, or 3.1%, and certificates of deposit increased $54.8 million, or 7.4%. Intense competition for deposits throughout 2007 resulted in the offering of elevated interest rates, especially for certificates of deposit.

In 2008, transaction deposit accounts increased $88.1 million, or 19.4%, and certificates of deposit decreased $10.6 million, or 1.3%. We believe the growth in deposits and the shift in the mix of deposits were due to the desire of depositors to place their funds in a stronger capitalized financial institution and in more liquid accounts as uncertainties arose regarding the health of the economy.

13

The Company obtained $78 million of brokered certificates of deposit in 2006 and used the funds primarily to pay off some of the higher rate borrowed funds of Eastern that were outstanding at the time of the acquisition of a controlling interest in Eastern. Brokered deposits amounted to $68 million at December 31, 2007 and $26 million at December 31, 2008. The reduction resulted from payoffs upon maturity. The deposits were not rolled over because the rates offered on new brokered deposits were higher than rates available on alternative funding sources.

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, 2008							Year ended December 31, 2007
				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	$	83,868		6.52	%	0.27	%	$	83,991	6.86	%	0.31	%
Savings accounts	88,105			6.85		1.37		93,346		7.63		1.62
Money market savings accounts	255,468			19.87		2.41		218,691		17.87		2.84
Non-interest-bearing demand checking accounts	66,651			5.18		—		62,803		5.13		—
Total transaction deposit accounts	494,092			38.42		1.54		458,831		37.49		1.74
Retail certificates of deposit by original maturity:
Six months or less	219,775			17.09		3.59		74,967		6.12		4.16
Over six months through 12 months	487,474			37.91		4.27		615,338		50.28		5.03
Over 12 months through 24 months	49,259			3.83		3.57		33,065		2.70		4.21
Over 24 months	35,381			2.75		3.99		41,708		3.41		3.90
Total retail certificates of deposit	791,889			61.58		4.02		765,078		62.51		4.84
Total average retail deposits	$	1,285,981		100.00	%	3.07	%	$	1,223,909	100.00	%	3.68	%
Total average brokered certificates of deposit	$		40,922			5.40	%	$	74,558			5.38	%

	Year ended December 31, 2006
			Percent
			of total
			average		Weighted
	Average		retail		average
	balance		deposits		rate
	(Dollars in thousands)
NOW accounts	$	89,008	7.62	%	0.25	%
Savings accounts	112,774		9.66		1.60
Money market savings accounts	219,533		18.80		2.43
Non-interest-bearing demand checking accounts	61,869		5.30		-
Total transaction deposit accounts	483,184		41.38		1.52
Retail certificates of deposit by original maturity:
Six months or less	102,573		8.79		3.97
Over six months through 12 months	433,928		37.16		4.45
Over 12 months through 24 months	89,728		7.68		3.38
Over 24 months	58,274		4.99		3.46
Total retail certificates of deposit	684,503		58.62		4.15
Total average retail deposits	$	1,167,687	100.00	%	3.07	%
Total average brokered certificates of deposit	$	49,598			5.37	%

14

At December 31, 2008, the Company had outstanding $324.8 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	$	44,557	3.30	%
Over three months through six months	91,665		3.21
Over six months through 12 months	130,194		3.55
Over 12 months	58,393		3.72
	$	324,809	3.45

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, 2008, the Company had $737 million in outstanding advances from the FHLB and had the capacity to borrow an additional $121 million from the FHLB.

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

	Year ended December 31,
	2008			2007			2006
	(Dollars in thousands)
Advances from the FHLB:
Average balance outstanding	$	641,131		$	488,210		$	491,946
Maximum amount outstanding at any month end during the year	744,942			548,015			534,223
Balance outstanding at end of year	737,418			548,015			463,806
Weighted average interest rate during the year	4.25		%	4.86		%	4.70		%
Weighted average interest rate at end of year	3.75		%	4.67		%	4.79		%

Return on Equity and Assets

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

	Year ended December 31,
	2008		2007		2006
Return on assets (net income divided by average total assets)	0.51	%	0.75	%	0.89	%
Return on equity (net income divided by average stockholders’ equity)	2.56	%	3.23	%	3.53	%
Dividend payout ratio (dividends declared per share divided by net income per share)	336.36	%	246.67	%	217.65	%
Equity to assets ratio (average stockholders’ equity divided by average total assets)	20.09	%	23.16	%	25.25	%

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 minority interest position. Effective April 1, 2007 and April 1, 2008, Mr. Fanger purchased required and discretionary units of interest which resulted in an increase in total minority interest ownership to 14.0%. For more information about Eastern, see note 2 of the Notes to Consolidated Financial Statements in the Company’s 2008 Annual

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Report to Stockholders, which is incorporated herein by reference.

Brookline Securities Corp. (“BSC”) is a wholly-owned subsidiary of the Company and BBS Investment Corp. (“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, 2008, BSC and BBS had total assets of $20.2 million and $343.8 million, respectively, of which $19.0 million and $339.4 million, respectively, were in investment securities and short-term investments.

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 equaled the dividends paid by MFCI and MFCII to the holders of the trust preferred securities.

The $5.0 million of trust preferred securities issued by MFCI were called and paid off by MFCI on April 22, 2007. The interest rate on the debentures, which changed semi-annually to six-month LIBOR plus 3.70%, was 9.09% at December 31, 2006 and at the time of pay-off.

The $7.0 million of trust preferred securities issued by MFCII were called and paid off by MFCII on February 15, 2008. The interest rate on the debentures, which changed quarterly to three-month LIBOR plus 3.25%, was 8.12% at December 31, 2007 and at the time of pay-off.

Personnel

As of December 31, 2008, the Company had 219 full-time employees and 26 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 a federally chartered stock savings institution subject to regulation, examination and supervision by the Office of Thrift Supervision (“OTS”) and, to a lesser extent, the Federal Deposit Insurance Corporation (“FDIC”). The Bank is also regulated by the Board of Governors of the Federal Reserve System with respect to reserves to be maintained against deposits and other matters. 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.

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

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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. Additionally, a bank that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the bank. In assessing an institution’s capital adequacy, the OTS takes into consideration not only these numeric factors but also qualitative factors, and has the authority to establish higher capital requirements for individual banks where necessary.

At December 31, 2008, 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, which generally does not include real estate. As of December 31, 2008, 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, 2008, the Bank maintained 71.1% 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.

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

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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”. 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. A holding company for a bank required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the bank’s assets at the time it was notified or deemed to be undercapitalized by the OTS, or the amount necessary to restore the bank to

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adequately capitalized status. This guarantee remains in place until the OTS notifies the bank that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the bank, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. 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, 2008, 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. However, the FDIC increased the deposit insurance available on all deposit accounts to $250,000, effective until December 31, 2009. In addition, certain non-interest-bearing transaction accounts maintained with financial institutions participating in the FDIC’s Temporary Liquidity Guarantee Program are fully insured regardless of the dollar amount until December 31, 2009. The Bank has opted to participate in that aspect of the FDIC’s Temporary Liquidity Guarantee Program.  See “—Temporary Liquidity Guarantee Program.”

FDIC regulations assess insurance premiums based on an institution’s risk. Under this assessment system, the FDIC evaluates the risk of each financial institution based on its supervisory rating, financial ratios and long-term debt issuer rating.  In 2008, the rates for nearly all financial institutions varied between five and seven cents for every $100 of domestic deposits. The assessment paid for the year ended December 31, 2008 was partially offset by a $356,000 credit from the FDIC to the Bank. On December 22, 2008, the FDIC raised the current deposit insurance assessment rates uniformly for all institutions to a range from ten to fourteen cents for every $100 of domestic deposits effective in the first quarter of 2009. On February 27, 2009, the FDIC announced that, commencing in April 2009, its rates would increase to a range of twelve cents to sixteen cents per $100 in deposits at most banks. It also announced that it would impose on one-time emergency fee of twenty cents per $100 in insured deposits to be collected in the 2009 third quarter. These changes in rates and the imposition of the one-time emergency fee will result in a significantly higher level of expense for the Company in 2009 for FDIC insurance. Federal law requires the FDIC to establish a deposit reserve ratio for the deposit insurance fund of between 1.15% and 1.50% of estimated deposits. The FDIC has designated the reserve ratio for the deposit insurance fund through the first quarter of 2009 at 1.25% of estimated insured deposits.

Temporary Liquidity Guarantee Program. On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program. This program has two components. One guarantees newly issued senior unsecured debt of a participating organization, up to certain limits established for each institution, issued between October 14, 2008 and June 30, 2009. The guarantee will remain in effect until June 30, 2012. In return for the guarantee, participating institutions pay the FDIC a fee based on the amount and maturity of the debt. The Bank opted not to participate in this component of the program.

The other component of the program provides full federal deposit insurance coverage for non-interest bearing transaction deposit accounts, regardless of dollar amount, until December 31, 2009. An annualized 10 basis point assessment on balances in non-interest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000 will be assessed on a quarterly basis to insured depository institutions that have not opted out of this component of the program.  The Bank is participating in this component of the program.

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 (“FHLB”), the Bank is required to acquire and hold shares of capital stock in the FHLB in an amount ranging from 3.0% to 4.5% of its borrowings from the FHLB, depending on the maturity of individual borrowings. As of December 31, 2008, 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, 2008, 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.

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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. Unlike bank holding companies, federal savings and loan holding companies are not subject to any regulatory capital requirements or to supervision by the Federal Reserve Board.

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 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.

On February 19, 2009, the Bank and Eastern stipulated and consented to a Cease and Desist Order (the “Order”) issued by the OTS. The Order became effective February 20, 2009. The Order was issued as a result of findings identified in the course of a regular examination of the Bank conducted as of September 8, 2008 relating to non-compliance by Eastern and the indirect auto lending department of the Bank with certain laws and regulations, including the Bank Secrecy Act (“BSA”), Anti-Money Laundering (“AML”) and Office of Foreign Control (“OFAC”) Compliance Programs. The Order requires Eastern and the indirect automobile lending department of the Bank to conduct a thorough risk assessment of their BSA/AML/OFAC risk exposure, develop and implement a comprehensive BSA/AML/OFAC Program and to take certain other actions specified in the Order. Eastern and the indirect automobile lending department of the Bank have already addressed most of the matters mentioned in the Order and expect to complete all of the actions required to be taken by the deadline dates stated in the Order. The Order will not have a material effect on the Company’s financial statements. This description of the Order is qualified in its entirety by reference to the Order, a copy of which is attached as Exhibit 99.1 in a Form 8-K filed by the Company on February 20, 2009 and which is incorporated by reference herein in its entirety.

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.

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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 the effectiveness 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, 2008, 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, 2008, the Company had no net operating loss carry forward for federal income tax purposes.

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 were subject to an annual excise tax imposed by the Commonwealth of Massachusetts equal to 10.5% of their taxable income in 2008. 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%.

As a result of a legislative change enacted in the third quarter of 2008, the annual tax rate on taxable income payable to the Commonwealth of Massachusetts will drop to 10.0%, 9.5% and 9.0% for the Company’s tax years beginning January 1, 2010, January 1, 2011 and January 1, 2012, respectively.

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

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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 2008 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.

·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.  The yield curve, which was inverted for much of the past few years, moved upward in 2008. Generally, an inverted yield curve causes the profitability of the Company to diminish. Improvement in net interest margin will continue to be difficult to achieve until the slope of the yield curve is upward for an extended period of time.

·Changes in the local real estate market. A significant part of the Company’s loan portfolio ($1.3 billion) is concentrated in commercial, multi-family, residential and construction loans secured by real estate located primarily in eastern Massachusetts. Decline in property values in 2008 and 2007 could cause the Company to experience a higher level of loan losses in coming years.

·Changes in the local, regional and national economy. In addition to real estate loans, the Company’s loan portfolio includes $597 million of indirect automobile loans, $147 million of loans to finance equipment to small businesses and $179 million of other commercial loans underwritten on the basis of the cash flows produced by the borrower’s business, assets pledged as collateral and personal guarantees. Recent weakness in the economy will likely affect the ability of borrowers to repay loans and result in an increase in loan losses in 2009 and possibly thereafter.

·Acquisitions and other growth initiatives. On January 7, 2005, the Company acquired Mystic and, on April 13, 2006, the Company increased its ownership interest in 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.

·Competition for loans and deposits. The Company faces significant competition for loans and deposits from other banks and financial institutions both within and beyond its local market place. Many of our competitors have substantially greater resources and higher lending limits than we do and may offer products and services that we do not, or cannot, provide. Many competitors are also willing to offer loans at lower rates or deposits at higher rates than the Company is offering. To compete with the pricing offered by competitors often results in lower profitability for the Company.

·Litigation risk. In the normal course of business, the Company may become involved in litigation, the outcome of which may have a significant adverse effect on its financial condition and profitability. If the Company’s subsidiary, Brookline Bank, is not successful in defending itself against a putative class action complaint initiated in February 2007, the resulting payments for damages, attorneys’ fees, litigation expenses and costs could be material. See Item 3 “Legal Proceedings” which appears elsewhere herein, for further information regarding the status of existing litigation.

·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

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substantial added costs for the Company. The requirements of this Act are especially burdensome 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.

·Systems failures, interruptions or breaches of security.Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, our deposits and our loans.  While we have established policies and procedures to prevent or limit the impact of systems failures, interruptions and security breaches, there can be no assurance that such events will not occur or that they will be adequately addressed if they do.  In addition, any compromise of our security systems could deter customers from using our web site and our online banking service, both of which involve the transmission of confidential information.  Although we rely on commonly used security and processing systems to provide the security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.

In addition, we outsource certain of our data processing to certain third-party providers.  If our third-party providers encounter difficulties, or if we have difficulty in communication with them, our ability to adequately process and account for customer transactions could be affected, and our business operations could be adversely impacted.  Threats to information security also exist in the processing of customer information through various other vendors.

The occurrence of any systems failure, interruption, or breach of security could damage our reputation and result in a loss of customers and business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability.  Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

·Changes in technology.The provision of financial products and services is highly dependent on technology.  Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on our ability to keep pace with technological advances and to invest in new technology as it becomes available.  Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services.  The ability to keep pace with technological change is important, and the failure to do so on our part could have a material adverse impact on our business and, therefore, on our financial condition and results of operations.

Item 1B.  Unresolved Staff Comments

None

Item 2.    Properties

At December 31, 2008, the Bank conducted its business from its main office located in Brookline, seventeen 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 auto 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. See “Lease Commitments” under note 13 of the Notes to Consolidated Financial Statements in the Company’s 2008 Annual Report to Stockholders, which is incorporated herein by reference, for information regarding the Company’s lease commitments at December 31, 2008.

Item 3.    Legal Proceedings

On February 21, 2007, Carrie E. Mosca (“Plaintiff”) filed a putative class action complaint against Brookline Bank in the Superior Court for the Commonwealth of Massachusetts (the “Action”). Ms. Mosca defaulted on a loan obligation on an automobile that she co-owned. She alleged that the form of notice of sale of collateral that the Bank sent to her after she and the co-owner became delinquent on the loan obligation did not contain information required to be provided to a consumer under the Massachusetts Uniform Commercial Code. The Action purported to be brought on behalf of a class of individuals to whom the Bank sent the same form of notice in connection with transactions documented as consumer transactions during the four year period prior to the filing of the Action. The Action sought statutory damages, an order restraining the Bank from future use of the form of notice sent to Ms. Mosca, an order barring the Bank from recovering any deficiency from other individuals to whom it sent the same form of notice, attorneys’ fees, litigation expenses and costs. The Bank answered denying liability and opposing Plaintiff’s motion to certify a class. The Court denied plaintiff’s motion for class certification in an order dated July 18, 2008. On July 31, 2008, Plaintiff served a motion for summary judgment seeking an award of

23

damages in the amount of $2,928 to her individually. The Bank opposed that motion and moved for summary judgment in its favor. On January 26, 2009, the Court denied Plaintiff’s motion for summary judgment and granted summary judgment in favor of the Bank. On February 23, 2009, the Plaintiff filed a notice of appeal.

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, 2008, 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, 2008 and 2007, appears on the inside of the back cover page of the Company’s 2008 Annual Report to Stockholders, which is incorporated herein by reference.

(b)Not applicable.

(c)  The following table presents a summary of the Company’s share repurchases during the quarter ended December 31, 2008.

Period	Total Number of Shares Purchased	Average  Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Programs (1) (2) (3)	Maximum Number of Shares that May Yet be Purchased Under the Programs
October 1 through December 31, 2008	—	—	2,195,590	4,804,410

(1)On April 19, 2007, the Board of Directors approved a program to repurchase 2,500,000 shares of the Company’s common stock. Prior to October 1, 2008, 2,195,590 shares authorized under this program had been repurchased. At December 31, 2008, 304,410 shares authorized under this program remained available for repurchase.

(2)On July 19, 2007, the Board of Directors approved another program to repurchase an additional 2,000,000 shares of the Company’s common stock. At December 31, 2008, all of the 2,000,000 shares authorized under this program remained available for repurchase.

(3)On January 17, 2008, the Board of Directors approved another program to repurchase an additional 2,500,000 shares of the Company’s common stock. At December 31, 2008, all of the 2,500,000 shares authorized under this program remained available for repurchase.

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

Item 6.    Selected Consolidated Financial Data

Selected Consolidated Financial Data of the Company appears on the back of the cover page and the immediate page thereafter of the Company’s 2008 Annual Report to Stockholders, which is incorporated herein by reference.

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 21 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2008 Annual Report to Stockholders, which is incorporated herein by reference.

24

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and Qualitative Disclosures About Market Risk appears on pages 17 through 19 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2008 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 2008 Annual Report to Stockholders, which is incorporated herein by reference:

	Pages
Reports of Independent Registered Public Accounting Firm	F-3
Consolidated Balance Sheets as of December 31, 2008 and 2007	F-4
Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006	F-5
Consolidated Statements of Comprehensive Income for the years ended December 31, 2008, 2007 and 2006	F-6
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008, 2007 and 2006	F-7 - F-9
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006	F-10 - F-11
Notes to Consolidated Financial Statements	F-12 - F-37

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, 2008 appears on page F-1 of the Company’s 2008 Annual Report to Stockholders, which is incorporated herein by reference.

The Attestation Report of the independent registered public accounting firm on the effectiveness of the Company’s internal control over financial reporting appears on page F-2 of the Company’s 2008 Annual Report to Stockholders, which is incorporated herein by reference.

Item 9B. Other Information

None

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information regarding directors, executive officers and corporate governance of the Company, compliance with section 16 (a) of the Exchange Act and the Company’s Code of Ethics is presented in the Company’s proxy statement dated March 30,

25

2009 under the headings “Proposal 1 — Election of Directors” and “Compensation Discussion and Analysis”, and is incorporated herein by reference.

There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s board of directors that have been implemented since the filing of the Company’s annual report on Form 10-K for the year ended December 31, 2007.

Item 11. Executive Compensation

The information required by this Item is presented under the heading “Proposal I - Election of Directors” of the Company’s proxy statement dated March 30, 2009, 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 30, 2009, which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information regarding transactions with related persons of the Company is presented in the Company’s proxy statement dated March 30, 2009 under the heading “Compensation Discussion and Analysis — Transactions with Certain Related Persons” and is incorporated herein by reference.

Information regarding the independence of the Company’s directors is presented in the Company’s proxy statement dated March 30, 2009 under the heading “Proposal 1 — Election of Directors” and is incorporated herein by reference.

Item 14. Principal Accountant 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” in the Company’s proxy statement dated March 30, 2009, which is incorporated herein by reference.

26

PART IV

Item 15. Exhibits and 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 (b) below are filed herewith or incorporated herein by reference to other filings.

(b)Required Exhibits

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, as amended, of Brookline Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to a previously filed Registration Statement and by reference to Exhibit 3 to a current report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2007)*
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, as amended (incorporated by reference to the Form 8-K filed on March 11, 2008)
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. (incorporated by reference to Exhibit 10.3.1 to Form 10-K filed on February 28, 2007)
10.3.2	Amendment No. 3 to the Supplemental Retirement Income Agreement by and between Brookline Bank and Richard P. Chapman, Jr. (incorporated by reference to the Form 8-K filed on December 18, 2008)
10.3.3	2005 Supplemental Retirement Income Agreement by and between Brookline Bank and Richard P. Chapman, Jr. (incorporated by reference to the Form 8-K filed on December 18, 2008)
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 (incorporated by reference to Exhibit 10.4.1 to Form 10-K filed on February 28, 2007)
10.4.2	Amendment No. 3 to the Supplemental Retirement Income Agreement by and between Brookline Bank and Charles H. Peck (incorporated by reference to the Form 8-K filed on December 18, 2008)
10.4.3	2005 Supplemental Retirement Income Agreement by and between Brookline Bank and Charles H. Peck (incorporated by reference to the Form 8-K filed on December 18, 2008)
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)

27

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 on 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	2008 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

28

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 19, 2009	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		Paul R. Bechet, Senior Vice President, Treasurer
	Executive Officer and Director		and Chief Financial Officer
	(Principal Executive Officer)		(Principal Financial and Accounting Officer)
	Date: February 19, 2009		Date: February 19, 2009

By:	/s/ George C. Caner, Jr.	By:	/s/ Hollis W. Plimpton, Jr.
	George C. Caner, Jr., Director		Hollis W. Plimpton, Jr., Director
	Date: February 20, 2009		Date: February 20, 2009

By:	/s/ David C. Chapin	By:	/s/ Joseph J. Slotnik
	David C. Chapin, Director		Joseph J. Slotnik, Director
	Date: February 19, 2009		Date: February 19, 2009

By:	/s/ John J. Doyle, Jr.	By:	/s/ William V. Tripp, III
	John J. Doyle, Jr., Director		William V. Tripp, III, Director
	Date: February 19, 2009		Date: February 19, 2009

By:	/s/ John A. Hackett	By:	/s/ Rosamond B. Vaule
	John A. Hackett, Director		Rosamond B. Vaule, Director
	Date: February 19, 2009		Date: February 19, 2009

By:	/s/ John L. Hall, II	By:	/s/ Peter O. Wilde
	John L. Hall, II, Director		Peter O. Wilde, Director
	Date: February 19, 2009		Date: February 19, 2009

By:	/s/ Charles H. Peck
	Charles H. Peck, Director
	Date: February 19, 2009

29

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, 2008, 2007 and 2006 (dollars in thousands except per share amounts):

	2008				2007				2006
	Basic		Diluted		Basic		Diluted		Basic		Diluted
Net income	$	12,850	$	12,850	$	17,742	$	17,742	$	20,812	$	20,812
Weighted average shares outstanding	57,607,498		57,607,498		59,133,252		59,133,252		60,369,558		60,369,558
Effect of dilutive securities	—		243,908		—		531,095		—		703,933
Adjusted weighted averageshares outstanding	57,607,498		57,851,406		59,133,252		59,664,347		60,369,558		61,073,491
Earning per share	$	0.22	$	0.22	$	0.30	$	0.30	$	0.34	$	0.34

EX-13

Exhibit 13

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial and other data of the Company set forth below are 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,
	2008		2007		2006		2005		2004
	(In thousands)
Selected Financial Condition Data:
Total assets	$	2,613,005	$	2,418,510	$	2,373,040	$	2,214,704	$	1,694,499
Loans	2,105,551		1,890,896		1,792,062		1,636,755		1,269,637
Allowance for loan losses (1)	28,296		24,445		23,024		22,248		17,540
Debt securities:
Available for sale	291,162		280,000		332,571		371,363		251,392
Held to maturity	161		189		233		410		889
Marketable equity securities	1,177		4,051		2,675		3,543		9,460
Goodwill and identified intangible assets	47,824		48,879		50,893		45,086		—
Retail deposits	1,327,844		1,250,337		1,210,206		1,168,307		773,958
Brokered deposits	26,381		67,904		78,060		—		—
Borrowed funds and subordinated debt	737,418		555,023		475,898		423,725		320,171
Stockholders’ equity	493,869		518,708		582,893		602,450		585,013
Non-performing loans	6,059		2,730		900		480		111
Non-performing assets	8,195		5,399		1,959		973		439

(1)The amounts at December 31, 2005 and 2004 include $1,263 and $866, respectively, representing an allowance for unfunded loan commitments which in years subsequent to 2005 were included in other liabilities.

	Year ended December 31,
	2008			2007			2006			2005			2004
	(In thousands)
Selected Operating Data:
Interest income	$	143,661		$	145,542		$	132,650		$	107,096		$	72,110
Interest expense	68,995			73,462			62,471			39,050			21,124
Net interest income	74,666			72,080			70,179			68,046			50,986
Provision for credit losses	11,289			6,882			2,549			2,483			2,603
Net interest income after provision for credit losses	63,377			65,198			67,630			65,563			48,383
Gains (losses) on write-downs and sales of securities, net	(2,849		)	47			558			853			1,767
Other non-interest income	4,097			4,296			3,292			4,444			3,443
Merger/conversion expense	—			—			—			(894		)	—
Amortization of identified intangible assets	(1,751		)	(2,014		)	(2,234		)	(2,370		)	—
Other non-interest expense	(41,164		)	(38,169		)	(34,635		)	(30,693		)	(22,989		)
Income before income taxes and minority interest	21,710			29,358			34,611			36,903			30,604
Provision for income taxes	8,658			11,411			13,614			14,873			12,837
Net income before minority interest	13,052			17,947			20,997			22,030			17,767
Minority interest in earnings of subsidiary	202			205			185			—			—
Net income	$	12,850		$	17,742		$	20,812		$	22,030		$	17,767

SELECTED FINANCIAL RATIOS AND OTHER DATA

	At or For the Year Ended December 31,
	2008			2007			2006			2005			2004
Performance Ratios:
Return on average assets	0.51		%	0.75		%	0.89		%	1.01		%	1.10		%
Return on average stockholders’ equity	2.56			3.23			3.53			3.61			2.99
Interest rate spread (1)	2.32			2.12			2.14			2.48			2.34
Net interest margin (1)	3.10			3.16			3.13			3.24			3.21
Dividend payout ratio	336.36			246.67			217.65			200.00			238.71
Capital Ratios:
Stockholders’ equity to total assets at end of year	18.90		%	21.45		%	24.56		%	27.20		%	34.52		%
Tier 1 core capital ratio at end of year (2)	16.47			18.03			19.39			20.64			27.66
Asset Quality Ratios:
Non-performing assets as a percent of total assets at end of year	0.31		%	0.22		%	0.08		%	0.04		%	0.03		%
Allowance for loan losses as a percent of loans at end of year (3)	1.34			1.29			1.28			1.36			1.38
Per Share Data:
Basic earnings per common share	$	0.22		$	0.30		$	0.34		$	0.37		$	0.31
Diluted earnings per common share	$	0.22		$	0.30		$	0.34		$	0.36		$	0.31
Number of shares outstanding at end of year (in thousands) (4)	58,373			57,990			61,584			61,584			59,143
Dividends paid per common share	$	0.74		$	0.74		$	0.74		$	0.74		$	0.74
Book value per common share at end of year	$	8.46		$	8.94		$	9.47		$	9.78		$	9.89
Tangible book value per common share at end of year	$	7.64		$	8.10		$	8.64		$	9.05		$	9.89
Market value per common share at end of year	$	10.65		$	10.16		$	13.17		$	14.17		$	16.32

(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, 2005 and 2004 included $1,263 and $866 (in thousands), respectively, representing an allowance for unfunded loan commitments which in years subsequent to 2005 was included in other liabilities. If such amounts were excluded, the allowances as a percent of total loans at December 31, 2005 and 2004 would have been 1.28% and 1.31%, respectively.

(4)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 Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of the Company.

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

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

Readers of this Annual Report should not rely solely on the forward-looking statements and should consider all risks and uncertainties mentioned in this Annual Report as well as those discussed under Item 1A. “Risk Factors” of the Company’s 2008 Annual Report on Form 10-K. The statements are representative only as of the date they are made and the Company undertakes no obligation to update any forward-looking statements.

Executive Level Overview

The following tables summarize the operating and financial condition highlights of the Company as of and for each of the years in the three year period ended December 31.

Operating Highlights

	Year ended December 31,
	2008			2007			2006
	(In thousands except per share amounts)
Net interest income	$	74,666		$	72,080		$	70,179
Provision for credit losses	11,289			6,882			2,549
Gains (losses) on write-downs and sales of securities, net	(2,849		)	47			558
Other non-interest income	4,097			4,296			3,292
Amortization of identified intangible assets	1,751			2,014			2,234
Other non-interest expense	41,164			38,169			34,635
Income before income taxes and minority interest	21,710			29,358			34,611
Provision for income taxes	8,658			11,411			13,614
Minority interest in earnings of subsidiary	202			205			185
Net income	12,850			17,742			20,812
Basic earning per common share	$	0.22		$	0.30		$	0.34
Diluted earning per common share	0.22			0.30			0.34
Interest rate spread	2.32		%	2.12		%	2.14		%
Net interest margin	3.10		%	3.16		%	3.13		%

1

Financial Condition Highlights

	At December 31,
	2008			2007			2006
	(In thousands)
Total assets	$	2,613,005		$	2,418,510		$	2,373,040
Net loans	2,077,255			1,866,451			1,769,038
Retail deposits	1,327,844			1,250,337			1,210,206
Brokered deposits	26,381			67,904			78,060
Borrowed funds and subordinated debt	737,418			555,023			475,898
Stockholders’ equity	493,869			518,708			582,893
Non-performing assets	$	8,195		$	5,399		$	1,959
Non-performing assets as a percent of total assets	0.31		%	0.22		%	0.08		%
Stockholders’ equity to total assets	18.90		%	21.45		%	24.56		%

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

·The interest rate environment. Interest rate spread and net interest margin are greatly influenced by the rate setting actions of the Federal Open Market Committee (the “FOMC”) of the Federal Reserve System. The FOMC lowered the rate for overnight federal fund borrowings between banks ten times from 5.25% on September 18, 2007 (the rate that had been in effect since June 29, 2006) to 2.00% on April 30, 2008, 1.50% on October 8, 2008 and to a target range between zero and 0.25% on December 16, 2008. The last change was the first time in fifty years that the rate was lower than 1%. The rate reductions had an immediate negative effect on the yield of the Company’s assets adjustable to market rates and those assets that replaced maturing or refinanced assets. The impact on rates paid for certificates of deposit and borrowed funds was less rapid as many of those liabilities matured later on. Interest rate spread and net interest margin started to improve in the 2008 second quarter as maturing certificates of deposit and borrowed funds were refinanced at lower rates. That trend continued in the 2008 third and fourth quarters and is expected to continue in the next few quarters. Recent volatility in national and international financial markets, however, could cause unexpected changes in interest rates and economic conditions.

·Foregone interest income. Primarily as a result of the payment of semi-annual extra dividends and repurchases of the Company’s common stock, the average balance of stockholders’ equity was $47.0 million less in 2008 than in 2007 and $40.4 million less in 2007 than in 2006. Foregone net interest income as a result of these reductions in stockholders’ equity was $1,708,000 ($993,000 after taxes) in 2008 and $1,715,000 ($998,000 after taxes) in 2007 based on the average cost of funds.

·Higher provisions for credit losses. The provision for credit losses was $11,289,000 in 2008 compared to $6,882,000 in 2007 and $2,549,000 in 2006. The higher provisions were due primarily to rising charge-offs in the indirect automobile (“auto”) loan portfolio and growth in the mortgage and commercial loan portfolios.

·Loss on write-downs and sales of securities. A loss of $2,849,000 ($1,850,000 after taxes) was recognized in 2008 as a result of the write-downs and sales of securities related substantially to perpetual preferred stock issued by the Federal National Mortgage Association (“FNMA”) and Merrill Lynch & Co., Inc. (“Merrill”).

·Assets quality and stockholders’ equity remain strong. Non-performing assets were $8.2 million, or 0.31% of total assets at December 31, 2008 compared to $5.4 million (0.22%) at December 31, 2007. The allowance for loan losses ($28.3 million) equaled 1.34% of total loans outstanding at December 31, 2008 and stockholders’ equity was $493.9 million, resulting in an equity to assets ratio of 18.9% as of that date.

Prospects for 2009

We expect the operating environment in 2009 to remain challenging. Economic signs suggest that borrowers will be under pressure to service their debt. This could result in higher loan losses, particularly with respect to the auto loan portfolio and Eastern’s loan portfolio. In view of this environment, we intend to continue to apply tight underwriting criteria. While this will likely limit auto loan growth and perhaps Eastern’s loan growth, we are optimistic about the potential for growth of our mortgage loan business.

2

Critical Accounting Policies

The accounting policies described below are considered critical to understanding our financial condition and operating results. Such accounting policies are considered to be especially important because they involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about matters that are inherently uncertain. The use of different judgments, assumptions and estimates could result in material differences in our operating results or financial condition.

Allowance for Loan Losses

The allowance for loan losses is maintained through provisions for loan losses charged to operating earnings. Loan losses are charged off in the period loans, or portions thereof, are deemed uncollectible. The determination of the loans on which full collectibility is not reasonably assured, the estimates of the fair value of the underlying collateral and the assessment of economic and other conditions are subject to assumptions and judgments by management. Valuation allowances could differ materially as a result of changes in, or different interpretations of, these assumptions and judgments.

The allowance is comprised of specific valuation allowances, general valuation allowances and an unallocated allowance. Management evaluates the adequacy of the allowance on a quarterly basis and reviews its conclusion as to the amount to be established with the Watch Committee and the Audit Committee. The Watch Committee is comprised of the lead independent director of the Board of Directors, the chief executive officer, the chief financial officer, the senior lending officer, the credit officer and several other lending officers representing the loan segments of the Company. The Audit Committee is comprised of three independent directors.

Specific valuation allowances are established in connection with individual loan reviews and the asset classification process, including the procedures for impairment. A loan is classified as “impaired” when, based on current information and other factors, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan. Evaluation procedures are applied to all loans except smaller balance homogenous loans. Loan evaluation considers the appraised value of a loan’s underlying collateral, loan payment history, the impact that local real estate market conditions may have on collateral values, the impact that current economic and business conditions may have on a borrower, current and historical experience of similar loans, internal and regulatory risk ratings, and the direction of interest rates. For multi-family and commercial real estate mortgage loans, the following additional factors related to the borrower or the underlying collateral are considered: occupancy levels for the property, the composition of tenants, cash flow estimates and the financial strength of personal guarantors.

The Company utilizes an internal rating system to monitor and evaluate the credit risk inherent in its loans. Ratings assigned to larger loans are subject to periodic review by a credit officer. Adverse internal ratings are assigned to loans that are either not performing or exhibit certain weaknesses that could jeopardize payment in accordance with the original terms. 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.

General valuation allowances represent loss allowances not allocated to individual problem loans. 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 impact that existing and projected economic and market conditions may have on the loans. General valuation allowances are inherently subjective because, even though they are based on objective data, it is management’s interpretation of that data that determines the amount of allowance deemed appropriate.

The unallocated part of the allowance for loan losses is even more subjective in nature. It is determined based on an evaluation of broader trends in the economy and values of real estate and other assets serving as loan collateral. Management believes the unallocated allowance is an important component of the total allowance because it addresses the probable inherent risk in loans with payments extended over many years and helps to minimize the risk related to the margin of imprecision in estimating allocated components of the allowance. The unallocated portion of the allowance is not allocated to the major categories of loans because such an allocation would imply a degree of precision that does not exist.

Goodwill Impairment

Goodwill is presumed to have an indefinite useful life and is tested at least annually for impairment at the reporting unit level. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. If the fair value of a reporting unit exceeds its carrying amount at the time of testing, the goodwill of the reporting unit is not considered impaired. Quoted market prices in active markets are the best evidence of fair value and are considered to be used as the basis for measurement, when available. Other acceptable valuation methods include present-value measurements based on multiples of earnings or revenues, or similar performance measures. Differences in valuation techniques could result in materially

3

different evaluations of impairment.

For the purposes of goodwill impairment testing, we identified two reporting units, the Company and Eastern Funding LLC (“Eastern”). We performed our annual goodwill impairment test of the Company as of November 30, 2008, using the quoted market price of the Company’s common stock as of that date. On that basis, we determined that the fair value of the Company as a reporting unit was in excess of its carrying value. We performed our annual goodwill impairment test of Eastern as of December 31, 2008. Due to the absence of a quoted market price, the following factors were evaluated to determine whether Eastern’s goodwill had been impaired: Eastern’s operating performance since our acquisition of a controlling interest in April 2006, the soundness of Eastern’s business fundamentals, Eastern’s projected operating results for the next five years, the acquisition premium that a willing buyer would have to pay for the Company to recover its investment in Eastern and the present value of projected cash flows. Based on our evaluation of those factors, we concluded there was no indication of goodwill impairment.

Investment Securities

At December 31, 2008, the investment portfolio included $292.3 million of investments classified as available for sale and $161,000 of mortgage-backed securities issued by U.S Government-sponsored enterprises classified as held for investment. Investments classified as available for sale consisted of mortgage-related debt securities issued by U.S. Government-sponsored enterprises ($279.4 million), other debt securities issued by U.S. Government-sponsored enterprises ($3.1 million), municipal obligations ($752,000), corporate obligations ($3.4 million), auction rate municipal obligations ($4.5 million) and marketable equity securities ($1.2 million).

Securities classified as available for sale are carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. Debt securities that we have the positive intent and ability to hold to maturity are classified as “held to maturity” and are carried at amortized cost.

The market values of our securities, particularly our fixed rate securities, are affected by changes in market interest rates. In general, as interest rates rise, the market value of fixed rate securities will decrease; as interest rates fall, the market value of fixed-rate securities will increase. On a quarterly basis, we review and evaluate fair value based on market data obtained from independent sources or, in the absence of active market data, from model-derived valuations based on market assumptions. If we deem any decline to be other than temporary, the security is written down to a new cost basis and the resulting loss is charged to earnings.

In 2008, we concluded that other-than-temporary impairment occurred regarding perpetual preferred stock owned that was issued by FNMA and Merrill. Aggregate pre-tax losses of $2,644,000 were recorded from the write-down of those securities. At December 31, 2008, gross unrealized gains and gross unrealized losses on the securities available for sale portfolio amounted to $4,137,000 and $2,344,000, respectively. See the section “Valuation of Certain Investment Securities” which follows for information regarding such gross unrealized gains and losses.

At December 31, 2008, the Company owned stock in the Federal Home Loan Bank of Boston (“FHLB”) with a carrying value of $36.0 million. The FHLB had announced that it had an unrealized loss of approximately $1.3 billion relating to private-label mortgage-backed securities it owned at September 30, 2008. If this unrealized loss were deemed to be an other-than-temporary loss in the future, it could exceed the FHLB’s current level of retained earnings and possibly put into question whether the fair value of FHLB stock owned by the Company was less than its carrying value. The Company will continue to monitor its investment in FHLB stock.

4

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 interest-earning assets, interest expense and rates paid on interest-bearing liabilities, interest rate spread and net interest margin for 2008, 2007 and 2006. Average balances are derived from daily average balances and yields include fees and costs which are considered adjustments to yields.

	Year ended December 31,
	2008							2007							2006
						Average							Average							Average
	Average					yield/		Average					yield/		Average					yield/
	balance			Interest (1)		cost		balance			Interest (1)		cost		balance			Interest (1)		cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Short-term investments	$	98,169		$	2,556	2.60	%	$	131,271		$	6,697	5.10	%	$	108,522		$	5,338	4.92	%
Debt securities (2).	296,334			13,914		4.70		283,841			14,251		5.02		354,174			15,292		4.32
Equity securities (2)	34,914			1,497		4.29		28,726			1,928		6.71		30,174			1,656		5.49
Mortgage loans (3)	1,121,366			66,412		5.92		1,033,749			65,865		6.37		1,078,769			69,015		6.40
Commercial loans - Eastern (3)	143,671			13,747		9.57		134,773			14,264		10.58		90,837			9,838		10.83
Other commercial loans (3)	109,704			6,149		5.60		79,356			5,565		7.01		66,744			4,643		6.96
Indirect automobile loans (3)	612,564			39,443		6.44		598,751			37,092		6.19		522,977			27,019		5.17
Other consumer loans (3)	3,855			242		6.28		3,413			264		7.74		3,030			229		7.56
Total interest-earning assets	2,420,577			143,960		5.95	%	2,293,880			145,926		6.36	%	2,255,227			133,030		5.90	%
Allowance for loan losses	(25,554		)					(23,266		)					(24,261		)
Non interest-earning assets	102,005							98,898							102,244
Total assets	$	2,497,028						$	2,369,512						$	2,333,210
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Deposits:
NOW accounts	$	83,868		229		0.27	%	$	83,991		258		0.31	%	$	89,008		219		0.25	%
Savings accounts	88,105			1,205		1.37		93,346			1,512		1.62		112,774			1,804		1.60
Money market savings accounts	255,468			6,158		2.41		218,691			6,215		2.84		219,533			5,335		2.43
Retail certificates of deposit	791,889			31,853		4.02		765,078			37,061		4.84		684,503			28,417		4.15
Total retail deposits	1,219,330			39,445		3.24		1,161,106			45,046		3.88		1,105,818			35,775		3.24
Brokered certificates of deposit	40,922			2,208		5.40		74,558			4,013		5.38		49,598			2,663		5.37
Total deposits	1,260,252			41,653		3.31		1,235,664			49,059		3.97		1,155,416			38,438		3.33
Borrowed funds	641,131			27,277		4.25		488,210			23,737		4.86		491,946			23,127		4.70
Subordinated debt	861			65		7.55		8,580			666		7.76		12,160			906		7.45
Total interest-bearing liabilities	1,902,244			68,995		3.63	%	1,732,454			73,462		4.24	%	1,659,522			62,471		3.76	%
Non-interest-bearing demandchecking accounts	66,651							62,803							61,869
Other liabilities	26,450							25,533							22,655
Total liabilities	1,995,345							1,820,790							1,744,046
Stockholders’ equity	501,683							548,722							589,164
Total liabilities andstockholders’ equity	$	2,497,028						$	2,369,512						$	2,333,210
Net interest income (tax equivalentbasis)/interest rate spread (4)				74,965		2.32	%				72,464		2.12	%				70,559		2.14	%
Less adjustment of tax exempt income				299							384							380
Net interest income				$	74,666						$	72,080						$	70,179
Net interest margin (5)						3.10	%						3.16	%						3.13	%

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

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

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

(4)     Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.

(5)     Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.

5

Highlights from the table on the preceding page follow.

·Interest rate spread improved to 2.32% in 2008 from 2.12% in 2007 and 2.14% in 2006 as the average rate paid on interest-bearing liabilities declined more rapidly than the average rate realized on interest-earning assets.

·The decline in net interest margin from 3.16% in 2007 to 3.10% in 2008 was due primarily to foregone interest income resulting from a $47.0 reduction in the average balance of stockholders’ equity between the two years caused by the payment of semi-annual extra dividends and repurchases of the Company’s common stock.

·The improvement in net interest margin from 3.13% in 2006 to 3.16% in 2007 was due primarily to the increase in the average balance and yield on auto loans and the increase in the average balance of higher yielding Eastern loans, but was diminished by foregone net interest income resulting from a $40.4 million reduction in the average balance of stockholders’ equity between the two years caused by the payment of semi-annual extra dividends and repurchases of the Company’s common stock.

·Certificates of deposit comprised 64.9% of the average balance of total retail deposits in 2008 compared to 65.9% in 2007 and 61.9% in 2006. Offsetting the reduction in certificates of deposit in 2008 was a rise in money market savings accounts from 19.9% of the average balance of total retail deposits in 2006 and 18.8% in 2007 to 21.0% in 2008. Since money market accounts can be withdrawn at any time, the interest rate paid on those deposits is generally lower than the interest rate paid on certificates of deposit. We believe the shift in the mix of deposits was attributable primarily to the recent turmoil in financial markets which led a number of depositors to place their funds in more liquid accounts.

·In 2008, $1.458 billion of certificates of deposit and advances from the FHLB with a weighted average rate of 4.14% matured while $1.530 billion of certificates of deposit and FHLB advances were added or rolled over at a weighted average rate of 3.05%. The resulting reduction in funding costs had a significant positive effect on net interest income in 2008.

·The average balance of loans outstanding grew $141.1 million (7.6%) in 2008 compared to 2007 and $87.7 million (5.0%) in 2007 compared to 2006. The growth in 2008 was in mortgage loans and commercial loans while the growth in 2007 was primarily in auto loans.

·The average balance of loans outstanding as a percent of the average balance of total interest-earning assets increased from 78.1% in 2006 to 80.7% in 2007 and 82.3% in 2008. Generally, the yield on loans is higher than the yield on investment securities.

·The average balance of short-term investments in 2008 was $33.1 million (25.2%) less than in 2007. The average rate earned on short-term investments declined from 5.10% in 2007 to 2.60% in 2008, reflecting the rate setting actions of the FOMC described earlier herein. Part of the reduction in short-term investments was used to fund the increase in debt and equity securities.

·The average balance of borrowings from the FHLB rose from $488.2 million in 2007 to $641.1 million in 2008. The additional borrowings were used primarily to fund part of the loan growth and the $47.0 million reduction in the average balance of stockholders’ equity between the two years. The average rate paid on FHLB borrowings declined from 4.86% in 2007 to 4.25% in 2008.

6

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, 2008									Year ended December 31, 2007
	compared to									compared to
	year ended December 31, 2007									year ended December 31, 2006
	Increase (decrease)									Increase (decrease)
	due to									due to
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)
Interest income:
Short-term investments	$	(1,408	)	$	(2,733	)	$	(4,141	)	$	1,154		$	205		$	1,359
Debt securities	611			(948		)	(337		)	(3,308		)	2,267			(1,041		)
Equity securities	359			(790		)	(431		)	(83		)	355			272
Mortgage loans	5,368			(4,821		)	547			(2,869		)	(281		)	(3,150		)
Commercial loans - Eastern	905			(1,422		)	(517		)	4,766			(340		)	4,426
Other commercial loans	1,848			(1,264		)	584			884			38			922
Indirect automobile loans	868			1,483			2,351			4,243			5,830			10,073
Other consumer loans	32			(54		)	(22		)	30			5			35
Total interest income	8,583			(10,549		)	(1,966		)	4,817			8,079			12,896
Interest expense:
Deposits:
NOW accounts	-			(29		)	(29		)	(13		)	52			39
Savings accounts	(81		)	(226		)	(307		)	(314		)	22			(292		)
Money market savings accounts	962			(1,019		)	(57		)	(21		)	901			880
Retail certificates of deposit	1,261			(6,469		)	(5,208		)	3,576			5,068			8,644
Total retail deposits	2,142			(7,743		)	(5,601		)	3,228			6,043			9,271
Brokered certificates of deposit	(1,815		)	10			(1,805		)	1,347			3			1,350
Total deposits	327			(7,733		)	(7,406		)	4,575			6,046			10,621
Borrowed funds	6,771			(3,231		)	3,540			(177		)	787			610
Subordinated debt	(583		)	(18		)	(601		)	(277		)	37			(240		)
Total interest expense	6,515			(10,982		)	(4,467		)	4,121			6,870			10,991
Net change in net interest income	$	2,068		$	433		$	2,501		$	696		$	1,209		$	1,905

Highlights from the above table follow.

·The increase in net interest income in 2008 compared to 2007 resulted from asset growth (primarily in the mortgage loan, commercial loan and auto loan portfolios) and lower rates paid on deposits and borrowed funds, offset in part by a reduction in asset yields and an increase in the outstanding balances of retail certificates of deposit and borrowings from the FHLB.

·The increase in net interest income in 2007 compared to 2006 resulted from asset growth (primarily in the auto and Eastern loan portfolios) and higher asset yields, most notably in auto loans and debt securities. Partly offsetting the benefit derived from asset growth and improved asset yields was the increasing percent of retail deposits comprised of certificates of deposit and the higher rates paid on retail deposits.

Auto Loans

The auto loan portfolio amounted to $597.2 million at the end of 2008 compared to $604.5 million at September 30, 2008, $594.3 million at the end of 2007 and $540.1 million at the end of 2006. Loan originations, which declined in the 2008 fourth quarter as auto industry sales plummeted in a weakening economic environment, are expected to continue to decline in 2009.

7

Due to rising delinquencies and charge-offs, as well as deteriorating trends in the economy and the auto industry, the Company took steps in the second half of 2007 to tighten its underwriting criteria. Also, effective July 1, 2008, the Company curtailed dealer accommodation loans due to higher risks normally associated with such loans.

The changes in underwriting mentioned above had a positive effect on loan quality. Loans originated to borrowers with credit scores below 660 declined from $44.0 million, or 13.7% of loans originated in 2006, to $40.0 million, or 11.8% of loans originated in 2007, and $14.9 million, or 5.1% of loans originated in 2008. In the 2008 fourth quarter, loans originated to borrowers with credit scores below 660 were $1.5 million, or 2.6% of loans originated in that period. The average credit scores of loans originated in 2008 and 2007 were 751 and 728, respectively, and the average credit score of loans outstanding at December 31, 2008 was 737.

Auto loans delinquent 30 days or more increased from $10.4 million, or 1.72% of loans outstanding, at September 30, 2008 and $11.7 million (1.98%) at December 31, 2007 to $13.1 million (2.20%) at December 31, 2008. While part of the increase in the 2008 fourth quarter was attributable to the normal effect of the year-end holiday season, it was also attributable to the further weakening of the economy that took place in that period. According to data published by the American Bankers Association, the rate of all indirect auto loans in Massachusetts delinquent 30 days or more at September 30, 2008 (the latest date available) was 3.14%. In view of the worsening economy, delinquencies and charge-offs are expected to be higher in 2009, but should be somewhat tempered because of the strengthened underwriting criteria applied to loans originated over the past several quarters.

Auto loan net charge-offs increased from $1,839,000 in 2006 (0.36% of average loans outstanding) to $3,989,000 (0.68%) in 2007 and $6,671,000 (1.12%) in 2008; net charge-offs in the 2008 fourth quarter were $1,863,000 (an annualized rate of 1.24%). The annual increases were attributable to the weakened economy as well as higher per unit losses from sales of repossessed vehicles caused in part by higher fuel prices.

Mortgage Loans

Mortgage loans outstanding at December 31, 2008 amounted to $1.282 billion. The portfolio grew $187.9 million in 2008 and $12.2 million in 2007. The average balance of loans outstanding increased $87.6 million (8.5%) in 2008 compared to 2007, but declined $45.0 million (4.2%) in 2007 compared to 2006.

The decline in the average balance of mortgage loans outstanding in 2007 was due to intensive competitive pricing pressure, especially in the multi-family mortgage sector, and competition from financial intermediaries who packaged loans for sale as debt instruments securitized by mortgage loans. Due to these conditions, it became increasingly more difficult to incorporate rising funding costs into the pricing of mortgage loan originations. Some financial institutions and other entities active in mortgage lending sought to enhance yields by originating higher risk loans. We refrained from originating option adjustable rate and “no documentation” mortgage loans and, accordingly, our portfolio did not include mortgage loans that we would classify as subprime. While the maintaining of high underwriting standards and a reluctance to match aggressive loan pricing by certain competitors resulted in fewer loan originations, it also resulted in an absence of significant non-performing mortgage loans.

The growth of the mortgage loan portfolio in 2008 was attributable to a change in the competitive landscape. Many of the market participants who were lenient in their underwriting criteria experienced a significant increase in non-performing mortgage loans and mortgage loan losses in 2008. In some instances, those participants failed and were absorbed into other financial institutions. These developments resulted in a more rational market place and enabled us to compete more effectively for quality mortgage loans. Growth in 2008 was concentrated primarily in commercial real estate mortgage loans ($77 million), residential mortgage loans ($68 million) and multi-family mortgage loans ($34 million).

Provision for Credit Losses

The provision for credit losses was $11,289,000 in 2008, $6,882,000 in 2007 and $2,549,000 in 2006. The provision for credit losses is comprised of amounts relating to the auto loan portfolio, the Eastern portfolio, the remainder of the loan portfolio and unfunded commitments.

The provision for loan losses related to the auto loan portfolio was $8,946,000 in 2008, $5,474,000 in 2007 and $3,098,000 in 2006. Each of these amounts exceeded the net charge-offs in those respective years. See the preceding subsection, “Auto Loans”, for a discussion of the reasons for the increase in auto loan net charge-offs and the status of the auto loan portfolio.

The provision for loan losses related to the Eastern loan portfolio was $1,143,000 in 2008, $1,223,000 in 2007 and $851,000 for the period from the date of acquisition of a controlling interest (April 2006) to the end of 2006. Net charge-offs were $993,000 (0.69% of average loans outstanding) in 2008, $1,101,000 (0.82%) in 2007 and $515,000 (0.57% on an

8

annualized basis) in the 2006 period. Eastern’s loans delinquent 30 days or more increased from $1.4 million (1.13% of total loans) at December 31, 2006 to $2.7 million (1.87%) at December 31, 2007 and $2.9 million (1.99%) at December 31, 2008. Eastern’s typical customer is a small business owner with limited capital resources who must rely primarily on the cash flow from his or her business to service debt. Such borrowers are less able to cope when economic conditions soften and, accordingly, represent higher risk borrowers. It is for this reason that rates charged on Eastern’s loans are significantly above those charged on other loans in our loan portfolio. In view of worsening economic conditions, it is likely that Eastern will experience higher loan charge-offs in 2009 than in 2008.

The remainder of the Company’s loan portfolio is comprised primarily of mortgage loans and commercial loans. Such loans, net of unadvanced funds, increased $205.4 million in 2008 and $27.7 million in 2007, but declined $56.1 million in 2006. The provision for loan losses related to this part of the loan portfolio was $1,504,000 in 2008 and $175,000 in 2007. In 2006, a credit of $1,400,000 to the provision for loan losses was taken to income. The provisions in 2008 and 2007 were established substantially in recognition of loan growth, as charge-offs and delinquencies in this segment of the loan portfolio were insignificant. The credit to income in 2006 resulted from reduction in loans outstanding through pay downs (including loans classified as higher risk loans) and a reduction in the reserve factor applied to the multi-family mortgage loan portfolio from 1.25% to 1.00%. The change in the reserve factor, which accounted for $828,000 of the credit to income in 2006, was made after consideration of a number of factors including loss experience, pay down of the portfolio and market conditions.

At December 31, 2006, the allowance for credit losses related to unfunded credit commitments amounting to $1,286,000 was reclassified from the allowance for loan losses to a liability account for unfunded credit commitments. In 2007, the liability account was increased to $1,487,000 by a $201,000 charge to the provision for credit losses in recognition of the increase in unfunded credit commitments in that year. In 2008, the liability account for unfunded credit commitments was reduced to $1,183,000 at December 31, 2008 by a $304,000 credit to the provision for credit losses in light of the lack of losses related to unfunded credit commitments over the past several years.

Valuation of Certain Investment Securities

FNMA Perpetual Preferred Stock

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

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

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

During the 2008 fourth quarter, the market value of FNMA perpetual preferred stock fluctuated from a high of $2.10 per share to a low of $0.37 per share. Based on the closing price of $0.46 per share, the market value of the Company’s FNMA shares was $40,000 compared to our carrying value of $135,000. The unrealized loss of $95,000 was considered to be immaterial to the Company’s consolidated financial statements as of and for the year ended December 31, 2008.

Merrill Perpetual Preferred Stock

BSC acquired 58,075 shares of Merrill adjustable rate preferred stock series 4 on August 28, 2007 at a total cost of $1,408,000. After the announcement of a significant 2007 third quarter loss by not only Merrill but other brokerage firms

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and major banks, the market price of our Merrill stock declined significantly. The subsequent reporting of further losses, as well as the collapse of Bear Stearns & Co., Inc., caused a further decline in the market value of our Merrill stock. Based on these developments, we concluded that an other-than-temporary impairment in the carrying value of our Merrill stock had occurred and, accordingly, we wrote down the carrying value of our Merrill stock to its $932,000 market value at March 31, 2008 by a $476,000 pre-tax charge to earnings.

On July 28, 2008, Merrill filed a Form 8-K announcing its plans to sell certain troubled assets at significant losses and that it would report a net loss in the 2008 third quarter, its fifth consecutive quarter of reported net losses. Merrill also announced that it was enhancing its capital by a $9.8 billion common stock offering and a pre-tax gain of $4.3 billion from the sale of its 20% interest in Bloomberg, L.P. Subsequent to the reporting of these developments, the per share price of the Merrill perpetual preferred stock dropped to a low of $8.08 per share on September 11, 2008. The per share stock rebounded as a result of the announcement on September 15, 2008 that Merrill would be acquired by Bank of America Corporation (“B of A”) in an all stock transaction. Completion of the acquisition took place on January 1, 2009.

At December 31, 2008, the per share market price of the Merrill perpetual preferred stock was $11.15 which resulted in an unrealized loss of $285,000 on our Merrill stock on that date. Subsequent to the closing of the acquisition, it was announced in January 2009 that (a) Merrill had a 2008 fourth quarter loss of $15.31 billion, (b) B of A had a 2008 fourth quarter loss of $1.79 billion, (c) the former chief executive officer of Merrill resigned from his executive position at B of A and (d) a new agreement had been entered into whereby the U. S. Government would provide B of A with $20 billion in additional capital and loss protection on $118 billion in toxic assets, and B of A would cut its quarterly dividend on common stock to $0.01 per share.

While the developments described in the preceding paragraph had a significant adverse effect on the market value of B of A common stock and the former Merrill perpetual preferred stock, the additional capital support and loss protection provided by the U.S. Government prompted a “buy” recommendation by one analyst reporting on B of A common stock.

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

We believe the former Merrill perpetual preferred stock owned by BSC possesses debt-like characteristics. The stock provides for periodic cash flows in the form of quarterly dividends, contains call features and is rated similar to debt securities. At December 31, 2008, the former Merrill stock had an investment grade rating and there had been no default in the payment of quarterly dividends. Subsequent to December 31, 2008, one of the rating agencies down-graded the former Merrill perpetual preferred stock to below investment grade. That event did not have a material impact on the Company’s financial position or results of operations.

Preferred Term Securities (“PreTSLs”)

PreTSLs represent an investment instrument comprised of a pool of trust preferred securities issued by a number of financial institutions and insurance companies. The investment instrument can be segregated into tranches (segments) that establish priority rights to cash flows from the underlying trust preferred securities. At December 31, 2008, we owned two PreTSLs.

On June 26, 2002, we purchased $2.0 million of the mezzanine tranche of PreTSL VI. The investment instrument matures on July 3, 2032 and is callable at the option of the issuers. Interest, which is payable quarterly at a floating rate per annum equal to three-month U.S. dollar Libor plus 1.80%, was last paid on January 4, 2009. The instrument is rated investment grade. At December 31, 2008, the carrying value of the instrument and its estimated fair value (determined through use of a present value technique) were $259,000 and $231,000, respectively. No other-than-temporary impairment was believed to exist at December 31, 2008 because we have first priority to future cash redemptions and none of the remaining issuers in the investment instrument has defaulted in making required payments. On February 20, 2009, one of the remaining issuers (the “Issuer”) announced that it will defer interest payments on its trust preferred securities. The Issuer had previously announced that it had filed an application to participate in the U.S. Treasury’s Capital Purchase Plan (the “CPP”). As of February 20, 2009, the U.S. Treasury had not acted on the Issuer’s application. The Issuer also announced that, in the event it received approval to participate in the CPP and chose to do so, it expected that it would end the deferral period using its existing funds to pay all accrued amounts owed on its trust preferred securities. We will continue to monitor developments affecting the Issuer.

On November 28, 2007, we purchased $1.0 million of the senior class A-1 tranche of PreTSL XXVIII. The investment instrument matures on March 22, 2038 and is callable at the option of the issuers on September 24, 2012. Interest, which is payable quarterly at a floating rate per annum equal to the three-month U.S. dollar Libor rate plus 0.90%, was last paid on December 22, 2008. The instrument is rated “AAA”. At December 31, 2008, the carrying value of the instrument and its estimated fair value (determined through use of a present value technique) were $986,000 and $780,000, respectively. No other-than-temporary impairment was believed to exist at December 31, 2008 because we have first priority to future cash

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redemptions and over 40% of the issuers would have to default before recovery of our investment could be in doubt. Of the 47 financial institution issuers and 11 insurance company issuers comprising the issuer pool, no issuer represents more than 4% of the entire pool. Only three issuers representing approximately 4% of the remaining aggregate investment pool at December 31, 2008 were in default at that date.

Other Corporate Debt Obligations

At December 31, 2008, the aggregate carrying value of other trust preferred securities and corporate debt obligations owned by the Company was $3,349,000 and the aggregate market value was $2,417,000. The aggregate unrealized loss on these securities of $932,000 was not considered to be an other-than-temporary impairment loss because of the financial soundness and prospects of the issuers and our ability and intent to hold the securities for a period of time to recover the unrealized losses.

Auction Rate Municipal Obligations

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

The auction rate obligations owned by the Company were rated “AAA” at the time of acquisition due, in part, to the guarantee of third party insurers who would have to pay the obligations if the issuers fail to pay the obligations when they become due. In the 2008 first quarter, public disclosures indicated that certain third party insurers were experiencing financial difficulties and, therefore, might not be able to meet their guarantee obligations should issuers fail to pay their contractual obligations. As a result, auctions relating to obligations owned by us and others failed to attract a sufficient number of investors. Upon an auction rate failure, generally the obligations become subject to a penalty imposing a rise in the interest rate to be paid on the obligation. Auction failures have continued throughout 2008, thus creating a liquidity problem for those investors who were relying on the obligations to be redeemed at auctions. Continued auction failures can result in an investment that investors expected to be short in duration becoming an investment with a long-term duration.

The failed auctions raise the question as to whether the fair value of the obligations as of December 31, 2008 was less than their face value. No active market has developed for auction rate municipal obligations. It is our understanding that periodic sales have occurred at prices in the range of 90% of face value, although we have not seen any authoritative published information to support our understanding. Further, we do not know to what extent investors who sold their auction rate municipal obligations were compelled to do so for a reason such as addressing a liquidity concern. Based on a cash flow analysis, the fair value of our auction rate municipal obligations was estimated to be $4,517,000, or $683,000 less than their carrying value. While the underlying assumptions used to arrive at estimated fair value are imprecise, the resulting estimate is considered reasonable in the circumstances.

Full collectibility of the municipal obligations owned by us has never been a concern. None of the issuers has defaulted on scheduled payments, the financial condition of the issuers is considered sound and we have the ability and intent to hold the debt obligations for a period of time to recover the unrealized losses.

Other Operating Highlights

Gains (Losses) on Write-downs and Sales of Securities. In addition to the losses recognized and described in the previous section “Valuation of Certain Investment Securities”, an additional net loss of $2,000 resulted from disposition of marketable equity securities in 2008. The sale of debt securities in 2007 resulted in a gain of $47,000 and the sale of marketable equity securities in 2006 resulted in a gain of $558,000.

Other Non-Interest Income. Other non-interest income amounted to $4,097,000 in 2008, $4,296,000 in 2007 and $3,292,000 in 2006.  The decline in 2008 from 2007 was due primarily to lower loan fees and less revenue on balances relating to outstanding checks, offset in part by a payment received in connection with resolution of litigation in our favor. The rise in other non-interest income in 2007 compared to 2006 resulted primarily from higher deposit service and loan fees. Fees from mortgage loan prepayments in 2008, 2007 and 2006 were $360,000, $515,000 and $246,000, respectively.

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Non-Interest Expense

Amortization of identified intangible assets amounted to $1,751,000 in 2008, $2,014,000 in 2007 and $2,234,000 in 2006. Excluding those charges, non-interest expenses rose from $34.6 million in 2006 to $38.2 million in 2007 (a 10.2% increase) and to $41.2 million in 2008 (a 7.8% increase).

The higher expenses in 2008 compared to 2007 were due primarily to legal fees relating to non-recurring matters, higher FDIC insurance premiums, supplemental retirement costs and marketing expenses, costs associated with a new branch, added personnel in the commercial lending and deposit areas, and higher costs for loan collection and auto repossessions. The higher expenses in 2007 compared to 2006 were due primarily to the inclusion of Eastern’s operations for all of 2007 compared to nine months in 2006, legal fees related to a purported class action complaint, higher fees for other professional services, compensation expense resulting from the vesting of restricted stock upon the retirement of members of the Board of Directors, and higher costs for loan collection and auto repossessions.

Provision for Income Taxes

The effective rate of income taxes was 39.9% in 2008, 38.9% in 2007 and 39.3% in 2006. The higher rate in 2008 was attributable primarily to a higher level of non-deductible expenses and a $98,000 charge to adjust deferred income taxes as a result of a legislative change that will reduce the tax rate payable to the Commonwealth of Massachusetts on future net income of the Company. The current rate of 10.5% will drop to 10.0%, 9.5% and 9.0% for the Company’s tax years beginning January 1, 2010, January 1, 2011 and January 1, 2012, respectively. Partially offsetting these charges was a credit resulting from adjustment of the Company’s liability for income taxes.

The decline in rate in 2007 was due primarily to a higher portion of taxable income being earned by the Company’s investment securities subsidiaries. Income in those subsidiaries is subject to a lower rate of state taxation than income earned by the Company and its other subsidiaries.

Other Financial Condition Highlights

Retail Deposits. Total retail deposits increased $77.5 million (6.2%) in 2008 and $40.1 million (3.3%) in 2007. Based on average balances outstanding, total retail deposits increased $58.2 million (5.0%) in 2008 and $55.2 million (5.0%) in 2007.The increases were due in part to the opening of a new branch in each year and to marketing initiatives.

Certificates of deposit comprised 59.2% of total retail deposits at December 31, 2008 compared to 63.7% at December 31, 2007 and 61.3% at December 31, 2006. Competition for deposits was intense in 2006 and 2007, resulting in elevated interest rates. The mix of deposits changed in 2008, especially in the third quarter, as funds flowed out of certificates of deposit into money market savings accounts. We believe the shift occurred due to the desire of depositors to place their funds in more liquid accounts as uncertainties arose regarding the health of the economy.

Brokered Deposits. Brokered deposits amounted to $26.4 million at the end of 2008 compared to $67.9 million at the end of 2007 and $78.1 million at the end of 2006. The reductions resulted from payoffs upon maturity. The deposits were not rolled over because the rates offered on new brokered deposits were higher than rates available on alternative funding sources.

Borrowed Funds. Borrowings from the FHLB increased from $463.8 million at the end of 2006 to $548.0 million at the end of 2007 and $737.4 million at the end of 2008. The increased borrowings were used primarily to fund loan growth and to pay off brokered deposits and subordinated debt ($7.0 million in 2007 and $5.0 million in 2006).

Stockholders’ Equity. Stockholders’ equity declined from $582.9 million at the end of 2006 to $518.7 million at the end of 2007 and $493.9 million at the end of 2008. The decline in 2007 was due primarily to the repurchase of 3,928,022 shares of the Company’s common stock at a total cost (including transaction costs) of $43.6 million and the payment to stockholders of two extra dividends of $0.20 per share each. The decline in 2008 was due primarily to the payment to stockholders of two extra dividends of $0.20 per share each.

Payment of the extra dividends semi-annually exceeded earnings and, accordingly, represented a return of capital to stockholders (subject to taxation) rather than a distribution of earnings. The total of extra dividends paid between August 2003 (the date of the first extra payment) and February 2009 (the date of the most recent declared payment), amounted to over $143 million, or $2.40 per share. 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. Future extra dividends and the per share amount of any such dividends will depend on an assessment of the Company’s capital needs and opportunities to deploy capital to grow the Company’s business, including through acquisitions, and to repurchase shares of the Company’s common stock.

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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,
	2008			2007			2006			2005			2004
	(In thousands)
Non-accrual loans:
Mortgage loans:
One-to-four family	$	632		$	29		$	—		$	167		$	—
Commercial real estate	2,318			—			90			—			—
Commercial loans - Eastern	2,641			2,265			657			—			—
Indirect automobile loans	468			427			153			313			111
Other consumer loans	—			9			—			—			—
Total non-accrual loans	6,059			2,730			900			480			111
Repossessed vehicles	1,274			1,621			784			493			328
Repossessed equipment	762			531			178			—			—
Other real estate owned	100			517			—			—			—
Other receivable	—			—			97			—			—
Total non-performing assets	$	8,195		$	5,399		$	1,959		$	973		$	439
Restructured loans	$	3,358		$	887		$	—		$	—		$	—
Allowance for loan losses as a percent of total loans	1.34		%	1.29		%	1.28		%	1.36		%(1)	1.38		%(1)
Non-performing loans as a percent of total loans	0.29			0.14			0.05			0.03			0.01
Non-performing assets as a percent of total assets	0.31			0.22			0.08			0.04			0.03

(1) The allowance for loan losses at December 31, 2005 and 2004 included $1,263 and $866, respectively, representing an allowance for unfunded loan commitments which in years subsequent to 2005 was included in other liabilities. If such amounts had been excluded from the allowance for loan losses, the allowance for loan losses as a percent of total loans would have been 1.28% at December 31, 2005 and 1.31% at December 31, 2004.

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) were granted due to a borrower’s financial condition.

Non-performing assets include other real estate owned resulting from foreclosures of properties securing mortgage loans or acceptance of a deed in lieu of foreclosure, repossessed vehicles resulting from non-payment of amounts due under auto loans and repossessed equipment resulting from non-payment of amounts due under Eastern loans. Other real estate owned and repossessed vehicles and equipment are recorded at estimated fair value less costs to sell.

Non-accrual loans at December 31, 2008 included residential mortgage loans to four borrowers and two commercial mortgage loans to one borrower that were adequately secured by the estimated values of the underlying properties. Due to the weakening economy, disposition of the one of the properties securing one of the commercial mortgage loans could take some time and could result in a loss. A specific reserve has been established for the potential loss exposure. Eastern and auto loans on non accrual are comprised of several loans. See the subsections “Auto Loans” and “Provision for Credit Losses” appearing elsewhere herein for information about rising delinquencies and net charge-offs in the Eastern and auto loan portfolios.

Other real estate owned at December 31, 2007 was comprised of two residential properties resulting from foreclosure. One of the properties was sold in 2008 without a loss. At the time of acquisition of the other property, the balances of the related loan exceeded the estimated fair value of the property less costs to sell by $165,000 and, accordingly, that amount was charged to the allowance for loan losses. The property remains in other real estate owned at December 31, 2008.

The increases in repossessed equipment in 2008 and 2007 were attributable to a rise in the number of Eastern borrowers who were unable to make required loan payments. The increase in repossessed vehicles in 2007 was attributable to an increase in borrowers who were unable to make required loan payments and weaker demand for repossessed vehicles at dealer auctions. The increase in repossessed vehicles during 2003 through 2006 was due primarily to growth of the auto loan portfolio during that time.

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Restructured loans at December 31, 2008 and 2007 were comprised of Eastern loans in which the maturity date of the loans was extended and/or interest rates were reduced to drop required monthly payments to more manageable amounts for the borrowers.

The other receivable amounting to $97,000 at December 31, 2006 was collected in full subsequent to that date.

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 manner in which the allowance is established is based on judgments, assumptions and estimates that are difficult, complex and subjective. Use of different judgments, assumptions and estimates could result in material differences in our operating results or financial condition. Accordingly, the policies that govern our assessment of the allowance for loan losses are considered “Critical Accounting Policies” and are discussed under that heading earlier in this report.

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,
	2008			2007			2006			2005			2004
	(In thousands)
Balance at beginning of year	$	24,445		$	23,024		$	22,248		$	17,540		$	16,195
Provision for loan losses	11,593			6,681			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:
Indirect automobile loans	7,410			4,645			2,277			1,803			1,384
Other consumer loans	23			17			7			17			25
One-to-four family mortgage loans	—			165			65			—			—
Commercial loans - Eastern	1,339			1,319			638			—			—
Other commercial loans	65			—			38			—			—
Total charge-offs	8,837			6,146			3,025			1,820			1,409
Recoveries:
Commercial real estate mortgage loans	4			4			4			79			7
Indirect automobile loans	739			657			439			445			138
Other consumer loans	6			8			6			20			6
Commercial loans - Eastern	346			217			123			—			—
Other commercial loans	—			—			7			—			—
Total recoveries	1,095			886			579			544			151
Net charge-offs	(7,742		)	(5,260		)	(2,446		)	(1,276		)	(1,258		)
Balance at end of year	$	28,296		$	24,445		$	23,024		$	22,248		$	17,540

See the subsection “Provision for Credit Losses” appearing earlier in this report for a discussion of the rising provision for loan losses and loan charge-offs recognized in the Company’s consolidated financial statements during the past three years.

Prior to December 31, 2006, the allowance for loan losses included amounts for unfunded credit 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 was considered to have other than normal credit risk.

Effective December 31, 2006, the allowance related to unfunded credit commitments of $1,286,000 was 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.

During the past five years, mortgage loan and commercial loan charge-offs were $230,000 and $103,000, respectively. While we believe this favorable experience is attributable to our adhering to conservative underwriting policies, it is also due to the generally strong economy that existed during that time. Such favorable experience may not be 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 our mortgage and commercial loan portfolios. 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.

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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,
	2008						2007						2006
	Amount		Percent of allowance to total allowance		Percent of loans in each category to net loans (1)		Amount		Percent of allowance to total allowance		Percent of loansin each categoryto net loans (1)		Amount		Percent of allowance to total allowance		Percent of loans in each category to net loans (1)
	(Dollars in thousands)
Mortgage loans:
One-to-four-family	$	1,085	3.83	%	17.36	%	$	883	3.61	%	15.71	%	$	858	3.73	%	16.08	%
Multi-family	3,020		10.67		14.46		2,853		11.67		15.23		3,020		13.12		16.99
Commercial real estate	7,094		25.07		22.06		5,867		24.00		19.71		5,909		25.66		20.58
Construction and development	604		2.14		1.45		462		1.89		1.23		629		2.73		1.77
Home equity	421		1.49		2.02		351		1.44		1.87		364		1.58		2.05
Second	334		1.18		1.28		299		1.22		1.27		208		0.90		0.94
Commercial loans — Eastern	2,577		9.11		7.06		2,427		9.93		7.56		2,296		9.97		7.16
Other commercial loans	1,645		5.81		5.52		1,615		6.61		5.50		1,339		5.82		3.87
Indirect automobile loans	7,937		28.05		28.60		5,662		23.16		31.71		4,176		18.14		30.38
Other consumer loans	40		0.14		0.19		39		0.16		0.21		33		0.14		0.18
Unallocated	3,539		12.51		—		3,987		16.31		—		4,192		18.21		—
Total	$	28,296	100.00	%	100.00	%	$	24,445	100.00	%	100.00	%	$	23,024	100.00	%	100.00	%

(1) Based on gross loans, net of unfunded credit commitments.

	At December 31,
	2005						2004
	Amount		Percent of allowance to total allowance		Percent of loansin each categoryto gross loans		Amount		Percent of allowance to total allowance		Percent of loans in each category to gross loans
	(Dollars in thousands)
Mortgage loans:
One-to-four-family	$	929	4.18	%	16.77	%	$	408	2.33	%	10.32	%
Multi-family	4,747		21.34		22.15		4,808		27.41		25.42
Commercial real estate	5,887		26.46		22.02		5,043		28.75		22.55
Construction and development	739		3.32		2.10		803		4.58		2.67
Home equity	429		1.93		2.50		141		0.80		1.07
Second	287		1.29		1.34		802		4.58		4.06
Commercial loans - Eastern	—		—		—		—		—		—
Other commercial loans	2,147		9.65		6.15		1,337		7.62		5.72
Indirect automobile loans	2,917		13.11		26.79		1,416		8.07		28.01
Other consumer loans	31		0.14		0.18		24		0.14		0.18
Unallocated	4,135		18.58		—		2,758		15.72		—
Total	$	22,248	100.00	%	100.00	%	$	17,540	100.00	%	100.00	%

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.

The Company utilizes an internal rating system as one of its methods to monitor and evaluate credit risk. At the time of approval, all loans other than auto 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

15

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.

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, 2008, there were loans of $14.0 million classified Special Mention, $5.6 million classified Substandard and $1.0 million classified Doubtful. There were specific reserves of $902,000 on such loans. At December 31, 2007, there were loans of $6.2 million classified Special Mention, $3.6 million classified Substandard and $1.1 million classified Doubtful. There were specific reserves of $1,385,000 on such loans. The increase in loans classified Special Mention is attributable to a $5.1 million commercial loan and three commercial real estate mortgage loans aggregating $3.1 million that are adequately secured and on which all required payments have been made on schedule. The commercial loan borrower has strong capital, but is experiencing declining profitability. Deteriorating economic conditions locally, regionally and nationally could cause some of the Company’s borrowers to experience difficulty in meeting their loan obligations, resulting in a higher level of non-performing assets in the future.

The allowance for loan losses related to the auto loan portfolio is established based on an estimate of cumulative losses over the life of the loans by year of origination. The projected cumulative loss is spread over the thirty month average life of the portfolio. Each quarter, based on actual experience and an assessment of economic factors, projected cumulative losses are updated for each year of loan originations. When projected cumulative losses exceed provisions charged to earnings to date plus provisions to be charged over the remainder of the 30 month average life period, the excess is added to the allowance for loan losses by a charge to the provision for loan losses.

The annual provision for loan losses related to auto loans has exceeded net charge-offs every year since we commenced auto lending in 2003. As a result, the allowance for loan losses allocated to the auto loan portfolio expressed as a percent of auto loans outstanding increased from 0.77% at the end of 2006 to 0.95% at the end of 2007 and 1.33% at the end of 2008. The latter percent exceeds the 1.12% annualized rate of net charge-offs experienced in 2008 and the annualized rate of 1.24% experienced in the fourth quarter of 2008.

The unallocated part of the allowance is based on an evaluation of factors such as real estate values in the areas where we lend money, concentrations in the amount of loans we have outstanding to large borrowers and trends in the economy that affect real estate values, the consumer, the auto industry and the business sectors in which the Company makes loans. 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.

The reserve factors assigned to the various loan categories have remained unchanged for several years. Upon a 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% effective December 31, 2006. This change was made for the following reasons:

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

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

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

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

·Demand for multi-family housing remained strong and there appeared to be no signs that would suggest deterioration in that lending segment.

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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. That was credited to earnings in 2006.

In reviewing reserve factors in 2006, we decided not to change the factors assigned to commercial real estate mortgage loans, construction loans and other commercial loans for the following reasons:

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

·      The collectibility of commercial real estate mortgage loans and other commercial loans is highly dependent on the strength of the economy. In light of current economic uncertainties, we considered it unwise to reduce the reserve factors assigned to these segments of the loan portfolio.

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 was not readily quantifiable and that the amounts previously allocated for such risk were based on somewhat arbitrary assumptions. Accordingly, commencing January 1, 2005, amounts previously allocated for such risk were included in the unallocated portion of the allowance. The amount allocated for such risks included in the table above was $1.5 million at December 31, 2004.

The amount of the unallocated allowance at December 31, 2008 is considered reasonable in light of current real estate market conditions and economic conditions affecting consumers and small business owners.

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 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	(2.37	)%
Base Case	—
-200 over one year	2.68	%

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%.

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 remain at current levels for all of 2009. 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 10 basis points and savings accounts by 115 basis points. There can be no assurance that the assumptions used will be validated in 2009.

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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.

The table below shows the Company’s interest rate sensitivity gap position as of December 31, 2008.

	At December 31, 2008
				More than			More than			More than			More than			More than
	One			one year			two years			three years			four years			five years			More than
	year			to two			to three			to four			to five			to ten			ten
	or less			years			years			years			years			years			years			Total
	(Dollars in thousands)
Interest-earning assets: (1)
Short-term investments	$	99,082		$	—		$	—		$	—		$	—		$	—		$	—		$	99,082
Weighted average rate	1.95		%	—			—			—			—			—			—			1.95		%
Debt securities (2)	126,004			67,283			30,489			21,821			16,744			23,933			2,932			289,206
Weighted average rate	4.19		%	4.21		%	4.23		%	4.18		%	4.19		%	4.34		%	6.90		%	4.24		%
Mortgage loans (3)	468,032			205,751			150,715			131,199			137,945			124,109			6,546			1,224,297
Weighted average rate	5.11		%	5.85		%	6.15		%	6.17		%	5.88		%	6.09		%	6.46		%	5.67		%
Commercial loans - Eastern (3)	47,155			33,806			26,224			15,576			9,340			14,847			521			147,469
Weighted average rate	10.03		%	10.24		%	10.09		%	9.74		%	9.43		%	9.09		%	8.37		%	9.92		%
Indirect automobile loans (3)	225,588			158,333			101,387			59,147			27,263			25,512			—			597,230
Weighted average rate	6.67		%	6.85		%	7.04		%	7.06		%	7.05		%	7.16		%	—			6.86		%
Other loans (3)	75,957			12,692			8,651			8,231			4,767			8,843			—			119,141
Weighted average rate	3.94		%	6.55		%	6.80		%	6.82		%	6.68		%	6.37		%	—			4.91		%
Total interest-earning assets	1,041,818			477,865			317,466			235,974			196,059			197,244			9,999			2,476,425
Weighted average rate	5.17		%	6.28		%	6.59		%	6.47		%	6.09		%	6.25		%	6.69		%	5.86		%
Interest-bearing liabilities: (1)
NOW accounts	28,868			28,868			28,871			—			—			—			—			86,607
Weighted average rate	0.18		%	0.18		%	0.18		%	—			—			—			—			0.18		%
Savings accounts	28,052			28,052			28,055			—			—			—			—			84,159
Weighted average rate	1.19		%	1.19		%	1.19		%	—			—			—			—			1.19		%
Money market savings accounts	279,791			23,726			—			—			—			—			—			303,517
Weighted average rate	2.58		%	1.76		%	—			—			—			—			—			2.52		%
Retail certificates of deposit (3)	621,633			136,387			15,771			3,062			8,939			—			—			785,792
Weighted average rate	3.28		%	3.60		%	4.28		%	4.30		%	3.80		%	—			—			3.37		%
Brokered certificates of deposit (3)	26,381			—			—			—			—			—			—			26,381
Weighted average rate	5.37		%	—			—			—			—			—			—			5.37		%
Borrowed funds (3)	393,400			188,884			67,443			25,843			29,050			23,306			9,432			737,358
Weighted average rate	3.57		%	3.66		%	4.00		%	4.56		%	4.09		%	4.74		%	5.18		%	3.75		%
Total interest-bearing liabilities	1,378,125			405,917			140,140			28,905			37,989			23,306			9,432			2,023,814
Weighted average rate	3.15		%	3.11		%	2.68		%	4.53		%	4.02		%	4.74		%	5.18		%	3.18		%
Interest sensitivity gap (4)	$	(336,307	)	$	71,948		$	177,326		$	207,069		$	158,070		$	173,938		$	567		$	452,611
Cumulative interest sensitivity gap	$	(336,307	)	$	(264,359	)	$	(87,033	)	$	120,036		$	278,106		$	452,044		$	452,611
Cumulative interest sensitivity gapas a percentage of total assets	(12.87		)%	(10.12		)%	(3.33		)%	4.59		%	10.64		%	17.30		%	17.32		%
Cumulative interest sensitivity gap as a percentage of total interest-earningassets	(13.58		)%	(10.68		)%	(3.51		)%	4.85		%	11.23		%	18.25		%	18.28		%

(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 and fair value adjustments are excluded.

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

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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.

At December 31, 2008, interest-earning assets maturing or repricing within one year amounted to $1.042 billion and interest-bearing liabilities maturing or repricing within one year amounted to $1.378 billion, resulting in a cumulative one year negative gap position of $336 million, or 12.9% of total assets.  At December 31, 2007, the Company had a cumulative one year negative gap position of $209 million, or 8.6% of total assets. The change in the cumulative one year gap position from the end of 2007 resulted primarily from the shortening of the average duration of borrowed funds and the shifting of a portion of certificates of deposit to money market savings accounts.

The Company’s cumulative positive interest sensitivity gap of assets and liabilities with expected maturities of more than three years changed from approximately $414 million, or 17.1%, of total assets at December 31, 2007 to $540 million, or 20.7%, of total assets at December 31, 2008. The change was due primarily to the shortening of the average duration of certificates of deposit and borrowed funds.

Other Market Risks. Included in the Company’s investment portfolio at December 31, 2008 were marketable equity securities with a market value of $1.2 million. That amount is net of unrealized losses of $422,000. 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, 2008. 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, 2008 by the expected payment period follows.

	Payment due by period
	Less than		One to		Three to		Over
	one year		three years		five years		five years		Total
	(In thousands)
Borrowed funds from the FHLB	$	393,460	$	256,327	$	54,893	$	32,738	$	737,418
Loan commitments (1)	245,162		—		—		—		245,162
Occupancy lease commitments (2)	1,960		3,549		2,220		2,213		9,942
Service provider contracts (3)	6,167		10,598		2		—		16,767
Retirement benefit obligations (4)	5,771		68		112		272		6,223
	$	652,520	$	270,542	57,227		$	35,223	$	1,015,512

(1)   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.

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

(3)   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.

(4)   The amount recognized as a liability for aggregate benefits payable to two executive officers under supplemental retirement income agreements at December 31, 2008 was $5,749,000. Since the officers were eligible to retire at that date and can elect to receive the amount owed to them under the agreements in a lump sum, such liability is included in the “less than one year” column of this table. If such elections were not made, the executives would receive the amounts due to them over 20 years in the case of one executive and 15 years in the case of the other executive commencing upon retirement.

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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 $77.5 million, or 6.2%, in 2008, growth in 2009 will depend on several factors, including the strength of the economy, the interest rate environment and competitor pricing.

The Company obtained $78.1 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 were obtained through brokerage firms operating on a national basis. An attractive feature of brokered deposits is that collateral does not have to be pledged to obtain the funds. Rates on the funds obtained were in the range of those offered by the FHLB. Brokered deposits amounted to $26.4 million at December 31, 2008. Maturing deposits were not rolled over because the rates offered on new brokered deposits were higher than rates available on alternative funding sources.

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 $464 million at the end of 2006 to $548 million at the end of 2007 and $737 million at the end of 2008. The increases were used primarily to fund part of the loan growth in 2007 and 2008, fund repurchases of the Company’s common stock in 2007, replace maturing brokered deposits and pay off $7.0 million of floating rate debentures. At December 31, 2008, the Company had the capacity to borrow an additional $121 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, 2008, such assets amounted to $121.4 million, or 4.6% of total assets.

At December 31, 2008, Brookline Bank exceeded all regulatory capital requirements. Brookline’s Tier I capital was $418.3 million, or 16.5% of adjusted assets. The minimum required Tier I capital ratio is 4.00%.

Recent Accounting Pronouncements

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. Adoption of SFAS 157 did not have a material impact on the Company’s financial position.

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

Statement of Financial Accounting Standards No. 141 (Revised 2007), “Business Combinations” (“SFAS 141R”) and Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (“SFAS 160”). In December 2007, the FASB issued SFAS 141R and SFAS 160. These statements require significant changes in the accounting and reporting for business acquisitions and the reporting of noncontrolling interests in subsidiaries. Among many changes under SFAS 141R, an acquirer will record 100% of all assets and liabilities at fair value for partial acquisitions, contingent consideration will be recognized at fair value at the acquisition date with changes possibly recognized  in earnings, and acquisition related costs will be expensed rather than capitalized. SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary. Key changes under the standard are that noncontrolling interests in a subsidiary will be reported as part of equity, losses allocated to a

20

noncontrolling interest can result in a deficit balance, and changes in ownership interests that do not result in a change of control are accounted for as equity transactions and, upon a loss of control, gain or loss is recognized and the remaining interest is remeasured at fair value on the date control is lost. SFAS 141R applies prospectively to business combinations for which the acquisition is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The effective date for applying SFAS 160 is also the first annual reporting period beginning on or after December 15, 2008. Adoption of these statements will affect the Company’s accounting for any business acquisitions occurring after the effective date and the reporting of any noncontrolling interests in subsidiaries existing on or after the effective date.

FASB Staff Position FAS 142-3 (“FSP FAS 142-3”), “Determination of the Useful Life of Intangible Assets”.  In April 2008, the FASB issued FSP FAS 142-3, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007) (“SFAS 141 R”), “Business Combinations”, and other U.S. generally accepted accounting principles. This Statement is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those years. Early application is not permitted. The Company has not yet determined the impact of the adoption of FSP FAS 142-3 on the Company’s financial position or results of operations.

FASB Staff Position Emerging Issues Task Force 03-6-01 (“FSP EITF 03-6-01”), FSP EITF 03-6-01, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. In June 2008, the FASB issued this FSP, which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share(“EPS”) under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128 (“SFAS 128”), “Earnings Per Share”. The guidance in this FSP applies to the calculation of EPS under SFAS 128 for share-based payment awards with rights to dividends or dividend equivalents. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This Statement is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings and selected financial data) to conform with the provision of this FSP. Early application is not permitted. The Company has not yet determined the impact of the adoption of FSP EITF 03-6-01 on the Company’s financial position or results of operations.

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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, 2008. 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, 2008, 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 the effectiveness 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 Brookline Bancorp, Inc.’s internal control over financial reporting as of December 31, 2008, 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, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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, Brookline Bancorp, Inc. maintained in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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, 2008 and 2007, 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, 2008, and our report dated February 27, 2009 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Boston, Massachusetts

February 27, 2009

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 (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period then ended. 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, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, 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), Brookline Bancorp, Inc.’s internal control over financial reporting as of December 31, 2008, 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 27, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Boston, Massachusetts

February 27, 2009

F-3

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands except share data)

	December 31,			December 31,
	2008			2007
ASSETS
Cash and due from banks	$	22,270		$	17,699
Short-term investments	99,082			135,925
Securities available for sale	292,339			284,051
Securities held to maturity (market value of $171 and $199, respectively)	161			189
Restricted equity securities	36,335			28,143
Loans	2,105,551			1,890,896
Allowance for loan losses	(28,296		)	(24,445		)
Net loans	2,077,255			1,866,451
Accrued interest receivable	8,835			9,623
Bank premises and equipment, net	10,218			9,045
Deferred tax asset	13,328			10,849
Prepaid income taxes	193			2,105
Goodwill	43,241			42,545
Identified intangible assets, net of accumulated amortization of $8,369 and $6,618, respectively	4,583			6,334
Other assets	5,165			5,551
Total assets	$	2,613,005		$	2,418,510
LIABILITIES AND STOCKHOLDERS’ EQUITY
Retail deposits	$	1,327,844		$	1,250,337
Brokered deposits	26,381			67,904
Borrowed funds	737,418			548,015
Subordinated debt	—			7,008
Mortgagors’ escrow accounts	5,655			5,051
Accrued expenses and other liabilities	20,040			20,116
Total liabilities	2,117,338			1,898,431
Minority interest in subsidiary	1,798			1,371
Stockholders’ equity:
Preferred stock, $0.01 par value; 50,000,000 shares authorized; none issued	—			—
Common stock, $0.01 par value; 200,000,000 shares authorized; 63,746,942 shares and 63,323,703 shares issued, respectively	637			633
Additional paid-in capital	518,712			513,949
Retained earnings, partially restricted	38,092			68,875
Accumulated other comprehensive income	1,385			121
Treasury stock, at cost - 5,373,733 shares and 5,333,633 shares, respectively	(62,107		)	(61,735		)
Unallocated common stock held by ESOP — 522,761 shares and 574,974 shares, respectively	(2,850		)	(3,135		)
Total stockholders’ equity	493,869			518,708
Total liabilities and stockholders’ equity	$	2,613,005		$	2,418,510

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,
	2008			2007		2006
Interest income:
Loans	$	125,993		$	123,050	$	110,744
Debt securities	13,689			13,910		14,960
Short-term investments	2,556			6,697		5,338
Restricted equity securities	1,229			1,778		1,484
Marketable equity securities	194			107		124
Total interest income	143,661			145,542		132,650
Interest expense:
Retail deposits	39,445			45,046		35,775
Brokered deposits	2,208			4,013		2,663
Borrowed funds	27,277			23,737		23,127
Subordinated debt	65			666		906
Total interest expense	68,995			73,462		62,471
Net interest income.	74,666			72,080		70,179
Provision for credit losses	11,289			6,882		2,549
Net interest income after provision for credit losses	63,377			65,198		67,630
Non-interest income:
Fees and charges	3,938			4,248		3,264
Gains (losses) on write-downs and sales of securities, net	(2,849		)	47		558
Other	159			48		28
Total non-interest income	1,248			4,343		3,850
Non-interest expense:
Compensation and employee benefits	21,004			20,523		19,305
Occupancy.	3,760			3,389		3,225
Equipment and data processing	6,847			6,652		6,017
Professional services	2,552			1,950		1,488
Advertising and marketing	1,251			1,036		1,019
Amortization of identified intangible assets	1,751			2,014		2,234
Other	5,750			4,619		3,581
Total non-interest expense	42,915			40,183		36,869
Income before income taxes and minority interest	21,710			29,358		34,611
Provision for income taxes	8,658			11,411		13,614
Net income before minority interest	13,052			17,947		20,997
Minority interest in earnings of subsidiary	202			205		185
Net income	$	12,850		$	17,742	$	20,812
Earnings per common share:
Basic	$	0.22		$	0.30	$	0.34
Diluted	0.22			0.30		0.34
Weighted average common shares outstanding during the year:
Basic	57,607,498			59,133,252		60,369,558
Diluted	57,851,406			59,664,347		61,073,491

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,
	2008			2007			2006
Net income	$	12,850		$	17,742		$	20,812
Other comprehensive income, net of taxes:
Unrealized securities holding (losses) gains	(842		)	1,264			1,626
Income tax (benefit) expense	(268		)	464			581
Net unrealized securities holding (losses) gains	(574		)	800			1,045
Adjustment of accumulated obligation for postretirement benefits	(21		)	(14		)	—
Income tax benefit	(9		)	(5		)	—
Net adjustment of accumulated obligation for postretirement benefits	(12		)	(9		)	—
Net unrealized holding (losses) gains	(586		)	791			1,045
Less reclassification adjustment for securities (losses) gains included in net income:
Realized (losses) gains	(2,849		)	47			558
Income tax (benefit) expense	(999		)	17			200
Net reclassification adjustment	(1,850		)	30			358
Net other comprehensive income from securities and postretirement benefits	1,264			761			687
Comprehensive income	$	14,114		$	18,503		$	21,499

See accompanying notes to the consolidated financial statements.

F-6

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Year ended December 31, 2008, 2007 and 2006

(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, 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 payment of dividend equivalent rights, dividend distribution on allocated ESOP shares and vesting of recognition and retention plan 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

(Continued)

F-7

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Continued)

Year ended December 31, 2008, 2007 and 2006

(Dollars in thousands)

	Common stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income (loss)			Treasury stock			Unallocated common stock held by ESOP			Total stockholders’ equity
Balance at December 31, 2006	$	630	$	508,248	$	96,229		$	(640	)	$	(18,144	)	$	(3,430	)	$	582,893
Net income	—		—		17,742			—			—			—			17,742
Other comprehensive income	—		—		—			761			—			—			761
Common stock dividends of $0.74 per share	—		—		(44,114		)	—			—			—			(44,114		)
Exercise of stock options (522,271 shares)	3		824		—			—			—			—			827
Treasury stock purchases (3,928,022 shares)	—		—		—			—			(43,591		)	—			(43,591		)
Reload stock options granted (155,663 options)	—		116		—			—			—			—			116
Payment of dividend equivalent rights	—		—		(982		)	—			—			—			(982		)
Income tax benefit, net, from exercise of non-incentive stock options, payment of dividend equivalent rights, dividend distribution on allocated ESOP shares and vesting of recognition and retention plan shares	—		1,814		—			—			—			—			1,814
Compensation under recognition and retention plans	—		2,604		—			—			—			—			2,604
Common stock held by ESOP committed to be released (54,107 shares)	—		343		—			—			—			295			638
Balance at December 31, 2007	$	633	$	513,949	$	68,875		$	121		$	(61,735	)	$	(3,135	)	$	518,708

(Continued)

F-8

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Continued)

Year ended December 31, 2008, 2007 and 2006

(Dollars in thousands)

	Common stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income		Treasury stock			Unallocated common stock held by ESOP			Total stockholders’ equity
Balance at December 31, 2007	$	633	$	513,949	$	68,875		$	121	$	(61,735	)	$	(3,135	)	$	518,708
Net income	—		—		12,850			—		—			—			12,850
Other comprehensive income	—		—		—			1,264		—			—			1,264
Common stock dividends of $0.74 per share	—		—		(42,606		)	—		—			—			(42,606		)
Exercise of stock options (622,162 shares)	4		1,210		—			—		—			—			1,214
Treasury stock purchases (40,100 shares)	—		—		—			—		(372		)	—			(372		)
Reload stock options granted (193,163 options)	—		97		—			—		—			—			97
Payment of dividend equivalent rights	—		—		(1,027		)	—		—			—			(1,027		)
Income tax benefit, net, from exercise of non-incentive stock options, payment of dividend equivalent rights, dividend distribution on allocated ESOP shares and vesting of recognition and retention plan shares	—		1,073		—			—		—			—			1,073
Compensation under recognition and retention plans	—		2,123		—			—		—			—			2,123
Common stock held by ESOP committed to be released (52,213 shares)	—		260		—			—		—			285			545
Balance at December 31, 2008	$	637	$	518,712	$	38,092		$	1,385	$	(62,107	)	$	(2,850	)	$	493,869

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,
	2008			2007			2006
Cash flows from operating activities:
Net income	$	12,850		$	17,742		$	20,812
Adjustments to reconcile net income to net cash provided from operating activities:
Provision for credit losses	11,289			6,882			2,549
Compensation under recognition and retention plans	2,123			2,604			2,858
Depreciation and amortization of bank premises and equipment	1,370			1,453			1,452
Accretion, net of amortization, of securities premiums and discounts	(672		)	(1,058		)	(132		)
Amortization of deferred loan origination costs, net	10,513			10,175			8,468
Amortization of identified intangible assets	1,751			2,014			2,234
Net accretion of acquisition fair value adjustments	(428		)	(781		)	(1,221		)
Amortization of mortgage servicing rights	23			19			16
Net losses (gains) from write-downs and sales of securities	2,849			(47		)	(558		)
Equity interest in earnings of other investment	—			—			(1		)
Minority interest in earnings of subsidiary	202			205			185
Write-down of other real estate owned	67			—			—
Deferred income taxes	(3,201		)	(255		)	(250		)
Release of ESOP shares	545			638			791
(Increase) decrease in:
Accrued interest receivable	788			687			(446		)
Prepaid income taxes	1,709			(304		)	(1,801		)
Other assets	(54		)	(1,126		)	575
Increase (decrease) in:
Income taxes payable	—			—			(630		)
Accrued expenses and other liabilities	(123		)	406			(138		)
Net cash provided from operating activities	41,601			39,254			34,763
Cash flows from investing activities:
Proceeds from sales of securities available for sale	7,964			29,706			903
Proceeds from redemptions and maturities of securities available for sale	145,162			138,914			230,091
Proceeds from redemptions and maturities of securities held to maturity	28			45			177
Purchase of securities available for sale	(161,468		)	(114,935		)	(189,364		)
(Purchase) redemption of Federal Home Loan Bank of Boston stock	(8,192		)	424			(5,486		)
Net increase in loans	(232,246		)	(114,286		)	(57,612		)
Acquisition, net of cash and cash equivalents acquired	—			—			(10,603		)
Purchase of bank premises and equipment	(2,607		)	(1,227		)	(580		)
Sale of other real estate owned	350			—			—
Net cash used for investing activities	(251,009		)	(61,359		)	(32,474		)

(Continued)

F-10

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

(In thousands)

	Year ended December 31,
	2008			2007			2006
Cash flows from financing activities:
Increase (decrease) in demand deposits and NOW, savings and money market savings accounts	$	88,102		$	(14,685	)	$	(53,163	)
(Decrease) increase in retail certificates of deposit	(41,523		)	54,868			95,334
(Decrease) increase in brokered certificates of deposit	(10,593		)	(10,156		)	78,060
Proceeds from Federal Home Loan Bank of Boston advances	8,286,940			1,098,500			2,966,500
Repayment of Federal Home Loan Bank of Boston advances	(8,097,505		)	(1,014,251		)	(2,914,133		)
Repayment of subordinated debt	(7,000		)	(5,000		)	—
Repayment of borrowed funds of subsidiary	—			—			(95,410		)
Increase (decrease) in mortgagors’ escrow accounts	604			(63		)	(263		)
Income tax benefit, net, from exercise of non-incentive stock options, payment of dividend equivalent rights, dividend distribution on allocated ESOP shares and vesting of recognition and retention plan shares	1,073			1,814			670
Exercise of stock options	1,214			827			—
Reload stock options granted	97			116			—
Purchase of treasury stock	(372		)	(43,591		)	—
Payment of dividends on common stock	(42,606		)	(44,114		)	(44,665		)
Payment of dividend equivalent rights	(1,027		)	(982		)	(960		)
Payment of dividend to minority owners of subsidiary	(375		)	(339		)	—
Proceeds from issuance of units of ownership to minority owners of subsidiary	107			131			—
Net cash provided from financing activities	177,136			23,075			31,970
Net (decrease) increase in cash and cash equivalents	(32,272		)	970			34,259
Cash and cash equivalents at beginning of year	153,624			152,654			118,395
Cash and cash equivalents at end of year	$	121,352		$	153,624		$	152,654
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits, borrowed funds and subordinated debt	$	69,152		$	73,595		$	61,631
Income taxes	9,073			10,468			14,896
Transfer of loans to other real estate owned	—			517			—
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, 2008, 2007 and 2006

(1) Summary of Significant Accounting Policies and Related Matters

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 eighteen 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 United States of America, 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 twelve 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, 2008, 71.1% 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, the valuation of investment securities 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 Corp. (“BBS”), and its 86.0% 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 and the valuation of investment securities.

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 and short-term investments.

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. 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

F-12

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

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. Effective January 1, 2008, estimated fair value is determined by applying the valuation framework specified in Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”. SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.

Unrealized gains (losses), net of related income taxes, are included in the “accumulated other comprehensive income (loss)” 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. Management evaluates securities for other-than-temporary impairment on a quarterly basis. Factors considered in determining whether an impairment is other-than-temporary include: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. 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 borrowers on 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.

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. 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.

F-13

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

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 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. 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

F-14

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

foreclosure. Other real estate owned and repossessed vehicles and equipment are recorded initially at estimated fair value less 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.

The fair value of awarded stock options is determined as of the grant date and is recorded as compensation expense over the period in which the stock options vest.

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.

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.

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” - an interpretation of FASB Statement No. 109 (“FIN 48”), which 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. Adoption of FIN 48 did not have a material effect on the Company’s financial position or results of operation.

The Company’s policy is to classify interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provision of the relevant tax law. The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company’s judgment changes regarding an uncertain tax position.

The Company did not have any unrecognized tax benefits accrued as income tax liabilities or receivables or as deferred tax items at December 31, 2008 and December 31, 2007.

F-15

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

Treasury Stock

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

(2) Acquisitions (Dollars in thousands)

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 United States of America. 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 minority interest position.

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. Mr. Fanger purchased required and discretionary units of interest which resulted in an increase in total minority interest ownership from 13.3% at April 13, 2006 to 13.7% at April 1, 2007 and 14.0% at April 1, 2008.

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 Company’s consolidated statements of income from the date of acquisition. Total assets acquired were $117.7 million and total liabilities assumed were $101.1 million. Goodwill resulting from the acquisition was $7,626. Identified intangible assets of $668 for the estimated value of Eastern’s customer list and $442 for the estimated value of the employment agreements with three executive officers were recognized at the time of the acquisition. 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 was $172 for each of the years ended December 31, 2008 and 2007, and $129 from the date of the acquisition through December 31, 2006. Amortization expense will be $172 in each of 2009 and 2010, $106 in 2011 and $84 in each of 2012 and 2013.

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”). 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, 2008, 2007 and 2006 amounted to $1,579, $1,842 and $2,105, respectively. Amortization expense in the coming years ending December 31 will be as follows: $1,316 in 2009, $1,053 in 2010, $789 in 2011, $526 in 2012 and $263 in 2013.

F-16

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

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

Aggregate reserves (in the form of deposits with the Federal Reserve Bank and vault cash) of $4,894 and $5,662 were maintained to satisfy federal regulatory requirements at December 31, 2008 and 2007, respectively.

Short-term investments are summarized as follows:

	December 31,
	2008		2007
Discount notes issued by U.S. Government-sponsored enterprises	$	88,609	$	46,720
Money market funds	10,189		67,745
Federal funds sold	84		21,260
Other deposits	200		200
	$	99,082	$	135,925

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.

(4) Investment Securities (In thousands)

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

	December 31, 2008
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
Securities available for sale:
Debt securities:
U.S. Government-sponsored enterprises	$	3,003	$	86	$	—	$	3,089
Municipal obligations	750		2		—		752
Auction rate municipal obligations	5,200		—		683		4,517
Corporate obligations	4,594		—		1,166		3,428
Collateralized mortgage obligations issued by U.S. Government-sponsored enterprises	100,614		1,019		—		101,633
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	174,884		2,932		73		177,743
Total debt securities	289,045		4,039		1,922		291,162
Marketable equity securities	1,501		98		422		1,177
Total securities available for sale	$	290,546	$	4,137	2,344		$	292,339
Securities held to maturity:
Mortgage-backed securities issued by U.S.Government-sponsored enterprises	$	161	$	10	$	—	$	171

F-17

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

	December 31, 2007
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
Securities available for sale:
Debt securities:
U.S. Government-sponsored enterprises	$	80,621	$	288	$	5	$	80,904
Municipal obligations	4,531		7		25		4,513
Auction rate municipal obligations	13,050		—		—		13,050
Corporate obligations	4,779		—		201		4,578
Other obligations	500		—		—		500
Collateralized mortgage obligations issued by U.S. Government-sponsored enterprises	129,137		532		118		129,551
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	47,182		79		357		46,904
Total debt securities	279,800		906		706		280,000
Marketable equity securities	4,464		176		589		4,051
Total securities available for sale	$	284,264	$	1,082	$	1,295	$	284,051
Securities held to maturity:
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	$	189	$	10	$	—	$	199

Debt securities of U.S. Government-sponsored enterprises include obligations issued by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Government National Mortgage Association (“ Ginnie Mae”), the 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 $3 of mortgage-backed securities at December 31, 2008.

Investment securities at December 31, 2008 and 2007 that have been in a continuous unrealized loss position for less than 12 months or 12 months or longer are as follows:

	December 31, 2008
	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	$	—	$	—	$	—	$	—	$	—	$	—
Municipal obligations	—		—		—		—		—		—
Auction rate municipal obligations	4,517		683		—		—		4,517		683
Corporate obligations	1,103		297		1,825		869		2,928		1,166
Collateralized mortgage obligations	—		—		—		—		—		—
Mortgage-backed securities	15,982		73		—		—		15,982		73
Total debt securities	21,602		1,053		1,825		869		23,427		1,922
Marketable equity securities	688		380		155		42		843		422
Total temporarily impaired securities	$	22,290	$	1,433	$	1,980	$	911	$	24,270	$	2,344

F-18

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

	December 31, 2007
	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	$	—	$	—	$	1,434	$	5	$	1,434	$	5
Municipal obligations	—		—		3,756		25		3,756		25
Corporate obligations	3,638		201		—		—		3,638		201
Collateralized mortgage obligations	34,314		118		—		—		34,314		118
Mortgage-backed securities	3,918		25		29,903		332		33,821		357
Total debt securities	41,870		344		35,093		362		76,963		706
Marketable equity securities	3,540		587		91		2		3,631		589
Total temporarily impaired securities	$	45,410	$	931	$	35,184	$	364	$	80,594	$	1,295

The unrealized losses on debt securities at December 31, 2008 were considered by management to be temporary in nature. The unrealized loss on mortgage-backed securities related primarily to acquisition premiums to be amortized over the estimated remaining life of the securities. Full collectibility of the auction rate municipal obligations and corporate obligations is expected because the financial condition of the issuers is considered to be sound, the issuers have not defaulted on scheduled payments, and the Company has the ability and intent to hold these securities for a period of time sufficient to recover all gross unrealized losses.

In 2008, management concluded that other-than-temporary impairment occurred regarding perpetual preferred stock issued by FNMA and Merrill Lynch and Co. Inc. (“Merrill”) owned by the Company. Aggregate losses of $2,644 were recorded from write-downs of those securities. At December 31, 2008, the aggregate carrying value and market value of FNMA and Merrill perpetual preferred stock owned by the Company amounted to $1,067 and $688, respectively. The unrealized loss on these securities and a $43 unrealized loss on the common stock of a financial institution owned by the Company at December 31, 2008 were considered to be immaterial to the Company’s consolidated financial statements as of and for the year ended December 31, 2008.

The maturities of the investments in debt securities at December 31, 2008 are as follows:

	Available for sale
	Amortized cost		Estimated fair value
Within 1 year	$	587	$	586
After 1 year through 5 years	56,610		57,052
After 5 years through 10 years	133,767		136,218
Over 10 years	98,081		97,306
	$	289,045	$	291,162

	Held to maturity
	Amortized cost		Estimated fair value
Within 1 year	$	2	$	2
After 1 year through 5 years	1		1
Over 10 years	158		168
	$	161	$	171

F-19

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

Mortgage-backed securities and collateralized mortgage obligations are included above based on their contractual maturities (primarily 10 years); the remaining lives, however, are expected to be shorter due to anticipated payments.

Restricted equity securities are as follows:

	December 31,
	2008		2007
Federal Home Loan Bank of Boston stock	$	35,961	$	27,769
Massachusetts Savings Bank Life Insurance Company stock	253		253
Other stock	121		121
	$	36,335	$	28,143

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 ranging from 3% to 4.5% of its outstanding advances from the FHLB, depending on the maturity of individual advances. Stock is purchased at par value. Upon redemption of the stock, which is at the discretion of the FHLB, the Company would receive an amount equal to the par value of the stock. At its discretion, the FHLB may also declare dividends on its stock. Such dividends amounted to $1,221, $1,770 and $1,476 for the years ended December 31, 2008, 2007 and 2006, respectively.

The FHLB has advised its members that it is focusing on preserving capital in response to ongoing market volatility and, accordingly, there will be little or no dividend payout in future quarterly periods; further, a moratorium has been placed on excess stock repurchases. It also announced that the estimated fair value of private-label mortgage-backed securities it owned at September 30, 2008 was approximately $1.3 billion less than the $4.6 billion carrying value of the securities. If this unrealized loss were deemed to be an other-than-temporary loss in the future, it could exceed the FHLB’s current level of retained earnings and possibly put into question whether the fair value of FHLB stock owned by the Company was less than par value. The FHLB has stated that it expects and intends to hold its private-label mortgage-backed securities to maturity. The Company will continue to monitor its investment in FHLB stock.

Write-downs and sales of investment securities are summarized as follows:

	Year ended December 31,
	2008		2007		2006
Sales of debt securities:
Proceeds	$	7,850	$	29,706	$	—
Gross gains	—		47		—
Write-downs and sales of marketable equity securities:
Write-downs	2,644		—		—
Proceeds from sales	114		—		903
Gross gains from sales	7		—		560
Gross losses from sales	212		—		2

F-20

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

(5)   Loans (In thousands)

A summary of loans follows:

	December 31,
	2008			2007
Mortgage loans:
One-to-four family	$	362,722		$	296,329
Multi-family	338,677			330,925
Commercial real estate	474,847			381,300
Construction and development	37,193			26,807
Home equity	42,118			35,110
Second	26,717			23,878
Total mortgage loans	1,282,274			1,094,349
Indirect automobile loans	597,230			594,332
Commercial loans — Eastern	147,427			141,675
Other commercial loans	178,887			154,442
Other consumer loans	3,979			3,909
Total gross loans	2,209,797			1,988,707
Unadvanced funds on loans	(121,709		)	(114,651		)
Deferred loan origination costs:
Indirect automobile loans	15,349			15,445
Commercial loans — Eastern	752			824
Other	1,362			571
Total loans	$	2,105,551		$	1,890,896

Restructured loans amounted to $3,358 and $887 at December 31, 2008 and 2007, respectively. Loans on non-accrual at December 31, 2008 and 2007 amounted to $6,059 and $2,730, respectively. Impaired loans, which included some of the restructured loans and all the loans on non-accrual, amounted to $6,861 and $3,760 at December 31, 2008 and 2007, respectively. Specific reserves of $902 and $920 existed on impaired loans at December 31, 2008 and 2007, respectively. If interest payments on impaired loans had been made in accordance with original loan agreements, interest income of $709, $957 and $112 would have been recognized on the loans in 2008, 2007 and 2006 compared to interest income actually recognized of $283, $664 and $65, 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 $10,433 and $7,869 at December 31, 2008 and 2007, 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,
	2008			2007
Balance at beginning of year	$	1,534		$	2,849
Addition of loans to a related party	—			1,170
New loans granted during the year	1,026			6,582
Removal of loans no longer to a related party	(128		)	(6,473		)
Repayments	(68		)	(2,594		)
Balance at end of year	$	2,364		$	1,534

F-21

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

(6)   Allowance for Loan Losses (In thousands)

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

	Year ended December 31,
	2008			2007			2006
Balance at beginning of year	$	24,445		$	23,024		$	22,248
Provision for loan losses	11,593			6,681			2,549
Allowance obtained through acquisitions	—			—			1,959
Transfer for off-balance sheet loan commitments	—			—			(1,286		)
Charge-offs	(8,837		)	(6,146		)	(3,025		)
Recoveries	1,095			886			579
Balance at end of year	$	28,296		$	24,445		$	23,024

At December 31, 2006, the allowance for credit losses related to unfunded credit commitments amounting to $1,286 was reclassified from the allowance for loan losses to a separate liability account. During the year ended December 31, 2007, the liability for unfunded credit commitments was increased to $1,487 by a $201 charge to the provision for credit losses. During the year ended December 31, 2008, the liability for unfunded credit commitments was decreased to $1,183 by a $304 credit to the provision for credit losses.

(7)   Bank Premises and Equipment (In thousands)

Bank premises and equipment consist of the following:

	December 31,
	2008		2007
Land	$	62	$	62
Office building and improvements	10,998		9,468
Furniture, fixtures and equipment	8,006		6,992
	19,066		16,522
Accumulated depreciation and amortization	8,848		7,477
	$	10,218	$	9,045

(8)   Deposits(In thousands)

A summary of retail deposits follows:

	December 31, 2008				December 31, 2007
	Amount		Weighted average rate		Amount		Weighted average rate
Demand checking accounts	$	67,769	0.00	%	$	66,538	0.00	%
NOW accounts	86,607		0.18		84,875		0.23
Savings accounts	67,473		0.96		67,351		0.94
Guaranteed savings accounts	16,686		2.14		19,799		3.39
Money market savings accounts	303,517		2.52		215,387		3.07
Total transaction deposit accounts	542,052		1.63		453,950		1.79
Retail certificate of deposit accounts maturing:
Within six months	343,274		3.14		433,023		4.88
After six months but within 1 year	278,359		3.46		328,568		4.94
After 1 year but within 2 years	136,387		3.60		16,137		4.01
After 2 years but within 3 years	15,771		4.28		6,553		4.08
After 3 years but within 4 years	3,063		4.30		8,992		4.98
After 4 years but within 5 years	8,938		3.80		3,114		4.29
Total retail certificate of deposit accounts	785,792		3.37		796,387		4.88
	$	1,327,844	2.66	%	$	1,250,337	3.76	%

F-22

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

Retail certificate of deposit accounts issued in amounts of $100 or more totaled $324,809 and $311,975 at December 31, 2008 and 2007, respectively.

A summary of brokered deposits follows.

	December 31, 2008				December 31, 2007
	Amount		Weighted average rate		Amount		Weighted average rate
Brokered certificate of deposit accounts maturing:
Within six months	$	26,381	5.37	%	$	40,807		5.39	%
After six months but within 1 year	—		—		666		5.45
After 1 year but within 2 years	—		—		26,431		5.37
Total brokered certificate of deposit accounts	$	26,381	5.37	%	$	67,904		5.38	%

Interest expense on deposit balances is summarized as follows:

	Year ended December 31,
	2008		2007		2006
Retail deposits:
NOW accounts	$	229	$	258	$	218
Savings accounts	1,205		1,512		1,804
Money market savings accounts	6,158		6,215		5,335
Certificate of deposit accounts	31,853		37,061		28,418
Total retail deposits	$	39,445	$	45,046	$	35,775
Brokered certificates of deposit	$	2,208	$	4,013	$	2,663

(9)   Borrowed Funds (In thousands)

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

	December 31, 2008				December 31, 2007
	Amount		Weighted average rate		Amount		Weighted average rate
Within 1 year	$	393,460	3.57	%	$	192,732	4.39	%
Over 1 year to 2 years	188,884		3.66		254,029		4.77
Over 2 years to 3 years	67,443		4.00		40,228		4.90
Over 3 years to 4 years	25,843		4.56		14,394		5.07
Over 4 years to 5 years	29,050		4.09		21,463		4.77
Over 5 years	32,738		4.87		25,169		5.20
	$	737,418	3.75	%	$	548,015	4.67	%

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-23

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

(10)   Subordinated Debt (Dollars in thousands)

Mystic Financial Capital Trust I (“MFCI”) and Mystic Financial Capital Trust II (“MFCII”) were 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 equaled the dividends paid by MFCI and MFCII to the holders of the trust preferred securities.

The $5,000 of trust preferred securities issued by MFCI were called and paid off by MFCI on April 22, 2007. The interest rate on the debentures, which changed semi-annually to six-month LIBOR plus 3.70%, was 9.09% at December 31, 2006 and at the time of pay-off.

The $7,000 of trust preferred securities issued by MFCII were called and paid off by MFCII on February 15, 2008. The interest rate on the debentures, which changed quarterly to three-month LIBOR plus 3.25%, was 8.12% at the time of pay-off and December 31, 2007 and 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,
	2008			2007			2006
Current provision:
Federal	$	9,590		$	9,886		$	11,422
State	2,023			1,785			2,263
Total current provision	11,613			11,671			13,685
Deferred provision (benefit):
Federal	(2,446		)	(85		)	80
State	(509		)	(175		)	(151		)
Total deferred benefit	(2,955		)	(260		)	(71		)
Total provision for income taxes	$	8,658		$	11,411		$	13,614

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,
	2008			2007			2006
Expected income tax expense at statutory federal tax rate	$	7,598		$	10,275		$	12,114
State taxes, net of federal income tax benefit	984			1,046			1,373
Dividend income received deduction	(50		)	(28		)	(32		)
Tax exempt municipal income	(146		)	(221		)	(215		)
Non-deductible portion of ESOP expense	91			120			170
Non-deductible expenses	342			205			206
Legislative change in state income tax rate	98			—			—
Other, net	(259		)	14			(2		)
	$	8,658		$	11,411		$	13,614
Effective income tax rate	39.9		%	38.9		%	39.3		%

F-24

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

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,
	2008		2007
Deferred tax assets:
Allowance for credit losses	$	12,181	$	10,224
Retirement and postretirement benefits	2,839		2,548
Recognition and retention plans	909		981
Unrealized loss on securities available for sale	—		92
Write-downs of marketable equity securities	925		—
Loss carry forward from acquisition	—		437
Depreciation	977		90
Other	—		2
Total gross deferred tax assets	17,831		14,374
Deferred tax liabilities:
Identified intangible assets and goodwill	2,623		2,421
Unrecognized gain relating to postretirement obligation	162		174
Savings Bank Life Insurance Company stock	104		106
Deferred loan origination costs	396		336
Unrealized gain on securities available for sale	638		—
Capitalized servicing rights	74		85
Acquisition fair value adjustments	485		367
Other	21		36
Total gross deferred tax liabilities	4,503		3,525
Net deferred tax asset	$	13,328	$	10,849

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.

The Company is subject to federal and state examinations for tax years after December 31, 2003.

(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-25

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

The following table provides the components of net periodic postretirement benefit cost and other amounts recognized in other comprehensive income.

	Year ended December 31,
	2008			2007			2006
Net periodic benefit cost:
Service cost	$	53		$	65		$	56
Interest cost	48			47			45
Prior service cost	(21		)	(21		)	(28		)
Actuarial (gain) loss	(11		)	(6		)	17
Net periodic benefit cost	$	69		$	85		$	90
Changes in postretirement benefit obligation recognized in other comprehensive income:
Net gain	$	(4	)	$	(3	)	$	—
Prior service credit	(17		)	(11		)	—
Total postretirement benefit credit recognized in other comprehensive income	$	(21	)	$	(14	)	$	—

The reduction in net periodic benefit costs in 2008 and 2007 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 2008 and 2007 and 6.00% in 2006.

The estimated prior service credit that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2009 is $27.

The liability for the postretirement benefits included in accrued expenses and other liabilities was $1,057 at December 31, 2008 and $975 at December 31, 2007.

The assumed health care trend used to measure the accumulated postretirement benefit obligation was 9.5% initially, decreasing gradually to 5% in 2015 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	$	22	$	(17	)
Effect on the accumulated postretirement benefit obligation	167		(135		)

401(k) Plan

The Company maintains a 401(k) plan which is a qualified, tax-exempt profit sharing plan with a salary deferral feature 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 $626 in 2008, $623 in 2007 and $528 in 2006.

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 $633 in 2008, $395 in 2007 and $367 in 2006. Aggregate benefits payable included in accrued expenses and other liabilities at December 31, 2008 and 2007 amounted to $5,749 and $5,116, respectively.

F-26

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

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, 2008 and 2007, which was $3,502 and $3,752, respectively, is eliminated in consolidation.

Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid. Employees vest in their ESOP account at a rate of 20% annually commencing in the year of completion of three years of credited service or immediately if service is terminated due to death, retirement, disability or change in control. Dividends on released shares are credited to the participants’ ESOP accounts. Dividends on unallocated shares are generally applied towards payment of the loan. ESOP shares committed to be released are considered outstanding in determining earnings per share.

At December 31, 2008, the ESOP held 522,761 unallocated shares at an aggregate cost of $2,850; the market value of such shares at that date was $5,567. Compensation and employee benefits expense was $545 in 2008, $638 in 2007 and $791 in 2006 based on the commitment to release to eligible employees 52,213 shares in 2008, 54,107 shares in 2007 and 56,080 shares in 2006.

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 none in 2008, $45 in 2007 and $134 in 2006. Total expense for the 2003 RRP was $2,123 in 2008, $2,559 in 2007 and $2,724 in 2006. Of the remaining 136,865 unvested RRP shares at December 31, 2008, 131,025 shares will vest on January 2, 2009 and 5,840 shares will vest on October 16, 2009. The expense to be recognized for those shares will be $80 in 2009.

As of December 31, 2008, the number of shares available for award under the 1999 RRP and the 2003 RRP were 29,774 shares and 132,920 shares, respectively.

Dividends paid on unvested RRP shares, which are recognized as compensation expense, were $112 in 2008, $238 in 2007 and $415 in 2006.

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.

F-27

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

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 certain of the options 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.

As of December 31, 2008, the number of options available for award under the Company’s 1999 Stock Option Plan and 2003 Stock Option Plan were 285,980 options and 1,226,000 options, respectively. In accordance with the terms of the Plans, dividend equivalent rights amounting to $1,027 in 2008, $982 in 2007 and $960 in 2006 were paid to holders of unexercised vested options.

Activity under the option plans is as follows:

	Year ended December 31,
	2008			2007			2006
Options outstanding at beginning of year	2,722,960			3,182,988			3,177,988
Reload options granted at:
$9.19 per option	130,518			—			—
$9.85 per option	25,378			—			—
$10.10 per option	37,267			—			—
$10.36 per option	—			28,717			—
$10.59 per option	—			23,861			—
$10.69 per option	—			46,249			—
$10.87 per option	—			56,836			—
$12.46 per option	—			7,929			—
Options granted at $12.91 per option	—			—			5,000
Cancelled reload options ($11.00 to $15.42 per option)	—			(16,849		)	—
Options exercised at $4.944 per option	(622,162		)	(522,271		)	—
Options forfeited at $12.91 per option	(40,000		)	—			—
Options forfeited at $15.02 per option	(4,000		)	(84,500		)	—
Total options outstanding at end of year	2,249,961			2,722,960			3,182,988
Exercisable as of December 31 at:
$4.944 per option	627,135			1,249,297			1,771,568
$9.19per option	130,518			—			—
$9.85 per option	25,378			—			—
$10.10 per option	37,267			—			—
$10.36 per option	28,717			28,717			—
$10.59 per option	23,861			23,861			—
$10.69 per option	46,249			46,249			—
$10.87 per option	56,836			56,836			—
$11.00 per option	—			—			5,393
$12.91 per option	2,000			41,000			40,000
$15.02 per option	1,269,000			1,273,000			1,357,500
$15.42 per option	—			—			3,527
Total options exercisable at end of year	2,246,961			2,718,960			3,177,988
Weighted average exercise price per option	$	11.43		$	10.11		$	9.37
Weighted average fair value per option of options granted during the year	$	0.50		$	1.11		$	2.65
Weighted average remaining contractual life in years at end of year	2.9			3.5			4.4

F-28

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

To calculate the weighted average data presented in this note and the 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,
	2008		2007		2006
Dividend yield	7.84	%	7.33	%	3.92	%
Expected volatility	19.13		18.90		22.61
Risk-free interest rate	2.84		4.45		5.21
Expected life of options	1.1 years		1.6 years		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 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,
	2008		2007
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans:
One-to-four family mortgage	$	9,444	$	6,300
Multi-family mortgage	21,054		8,467
Commercial real estate mortgage	10,846		25,641
Commercial	23,655		1,750
Unadvanced portion of loans	121,709		114,651
Unused lines of credit:
Equity	52,470		49,480
Other	5,984		3,493

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,
2009	$	1,960
2010	1,841
2011	1,708
2012	1,280
2013	941

F-29

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

The leases contain escalation clauses for real estate taxes and other expenditures. Total rental expense was $2,024 in 2008, $1,932 in 2007 and $1,804 in 2006.

Legal Proceedings

On February 21, 2007, Carrie E. Mosca (“Plaintiff”) filed a putative class action complaint against Brookline Bank in the Superior Court for the Commonwealth of Massachusetts (the “Action”). Ms. Mosca defaulted on a loan obligation on an automobile that she co-owned. She alleged that the form of notice of sale of collateral that the Bank sent to her after she and the co-owner became delinquent on the loan obligation did not contain information required to be provided to a consumer under the Massachusetts Uniform Commercial Code. The Action purported to be brought on behalf of a class of individuals to whom the Bank sent the same form of notice of sale of collateral during the four year period prior to the filing of the Action. The Action sought statutory damages, an order restraining the Bank from future use of the form of notice sent to Ms. Mosca, an order barring the Bank from recovering any deficiency from other individuals to whom it sent the same form of notice, attorneys’ fees, litigation expenses and costs. The Bank answered, denying liability and opposing Plaintiff’s motion to certify a class. The Court denied Plaintiff’s motion for class certification in an order dated July 18, 2008. On July 31, 2008, Plaintiff served a motion for summary judgment seeking an award of damages in the amount of $2,928 to her individually. The Bank opposed that motion and moved for summary judgement in its favor. On January 26, 2009, the Court denied Plaintiff’s motion for summary judgment and granted summary judgement in favor of the Bank. On February 23, 2009, the Plaintiff filed a motion of appeal.

(14)  Stockholders Equity (In thousands except share and 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, 2008, 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

In 2008, the Company repurchased 40,100 shares of its common stock at a total cost of $372, or $9.28 per share including transaction costs, and in 2007, the Company repurchased 3,928,022 shares of its common stock at a total cost of $43,591, or $11.10 per share including transaction costs.

As of December 31, 2008, the Company was authorized to repurchase up to 4,804,410 shares of its common stock. The Board of Directors has delegated to the discretion of the Company’s senior management the authority to determine the timing of the repurchases and the prices at which the repurchases will be made.

Restricted Retained Earnings

As part of the stock offering in 2002 and as required by regulation, Brookline 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

F-30

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

liquidation account. The liquidation account totaled $29,969 (unaudited) at December 31, 2008.

(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%.

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

	December 31,
	2008			2007
Stockholders’ equity (GAAP)	$	432,952		$	431,537
Deduct disallowed unrealized gains on debt securities available for sale	(2,242		)	(429		)
Deduct disallowed identified intangible assets and loan servicing assets	(12,388		)	(13,466		)
Regulatory capital (tangible capital)	418,322			417,642
Add allowance for loan losses equal to 1.25% of adjusted total assets	26,287			24,268
Total risk-based capital	$	444,609		$	441,910

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, 2008 and 2007, 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, 2008:
Tangible capital	$	418,322	16.5	%	$	38,106	1.5	%
Tier 1 (core) capital	418,322		16.5		101,616		4.0		$	127,020	5.0	%
Risk-based capital:
Tier 1	418,322		19.9						126,057		6.0
Total	444,609		21.2		168,077		8.0		210,096		10.0

F-31

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

					OTS requirements
					Minimum capital				Classified as
	Bank actual				adequacy				well capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
At December 31, 2007:
Tangible capital	$	417,642	18.0	%	$	34,739	1.5	%
Tier 1 (core) capital	417,642		18.0		92,638		4.0		$	115,798	5.0	%
Risk-based capital:
Tier 1	417,642		21.5						116,476		6.0
Total	441,910		22.8		155,302		8.0		194,127		10.0

(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, 2008				December 31, 2007
	Carrying		Estimated		Carrying		Estimated
	value		fair value		value		fair value
Financial assets:
Cash and due from banks	$	22,270	$	22,270	$	17,699	$	17,699
Short-term investments	99,082		99,082		135,925		135,925
Securities	328,835		328,845		312,383		312,393
Loans, net	2,077,255		2,104,496		1,866,451		1,875,910
Accrued interest receivable	8,835		8,835		9,623		9,623
Financial liabilities:
Demand, NOW, savings and money market savings deposits	542,052		542,052		453,950		453,950
Retail certificates of deposit	785,792		790,905		796,387		798,222
Brokered certificates of deposit	26,381		26,605		67,904		68,448
Borrowed funds	737,418		745,954		548,015		551,828
Subordinated debt	—		—		7,008		7,010

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

Level 1 - Quoted prices for identical instruments in active markets

Level 2 - Quoted prices for similar instruments in active or non-active markets and model-derived valuations in which

 all significant inputs and value drivers are observable in active markets

Level 3 - Valuation derived from significant unobservable inputs

Valuation techniques based on unobservable inputs 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.

F-32

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

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

The following table presents the balances of certain assets reported at fair value as of December 31, 2008:

	Carrying Value
	Level 1		Level 2		Level 3		Total
Assets measured at fair value on a recurring basis:
Securities available for sale	$	1,177	$	285,134	$	6,028	$	292,339
Assets measured at fair value on a non-recurring basis:
Collateral dependent impaired loans	$	—	$	1,850	$	—	$	1,850

The securities comprising the balance at December 31, 2008 in the level 3 column included $5,200 of auction rate municipal obligations, $1,245 of pools of trust preferred obligations and $500 of a trust preferred obligation issued by a financial institution, all of which lacked quoted prices in active markets. Based on a cash flow analysis, the fair value of the auction rate municipal obligations and the pools of trust preferred obligations was estimated to be $4,517 and $1,011, respectively. In the judgment of management, the fair value of the trust preferred obligation was considered to approximate its carrying value because it was deemed to be fully collectible and the rates paid on the security was higher than rates paid on securities with similar maturities.

In 2008, the fair value of securities available for sale using significant unobservable inputs (level 3) declined by $8,422 as a result of $6,300 of redemption and $1,550 of sales of auction rate municipal obligations at their face value, the full payment of a $500 debt obligation, the movement of a $400 trust preferred security to level 2, a $683 reduction in the estimated fair value of the auction rate municipal obligations and the addition of $1,011 of pools of trust preferred obligations.

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

The following is a further 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

December 31, 2008, 2007 and 2006

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, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006 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,
	2008		2007
Assets
Cash and due from banks	$	292	$	171
Short-term investments	760		24,566
Loan to subsidiary bank ESOP	3,502		3,752
Investment in subsidiaries, at equity	453,163		458,159
Goodwill	35,615		35,615
Prepaid income taxes	218		1,747
Other assets	530		2,310
Total assets	$	494,080	$	526,320
Liabilities and Stockholders’ Equity
Subordinated debt	$	—	$	7,008
Accrued expenses and other liabilities	211		604
Stockholders’ equity	493,869		518,708
Total liabilities and stockholders’ equity	$	494,080	$	526,320

F-34

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

Statements of Income

	Year ended December 31,
	2008			2007			2006
Dividend income from subsidiaries	$	15,000		$	32,268		$	10,086
Interest income:
Short-term investments	138			98			13
Loan to subsidiary bank ESOP	312			332			353
Equity interest in earnings of other investment	—			—			1
Total income	15,450			32,698			10,453
Expenses:
Interest on subordinated debt	65			666			906
Directors’ fees	108			58			109
Delaware franchise tax	168			168			166
Professional fees	75			44			71
Other	204			202			269
Total expenses	620			1,138			1,521
Income before income taxes and equity in undistributed net income of subsidiaries	14,830			31,560			8,932
Income tax expense (benefit)	100			(31		)	(234		)
Income before equity in undistributed net income of subsidiaries	14,730			31,591			9,166
Equity in undistributed (overdistribution of) net income of subsidiaries	(1,880		)	(13,849		)	11,646
Net income	$	12,850		$	17,742		$	20,812

F-35

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

Statements of Cash Flows

	Year ended December 31,
	2008			2007			2006
Cash flows from operating activities:
Net income	$	12,850		$	17,742		$	20,812
Adjustments to reconcile net income to net cash provided from operating activities:
Equity in undistributed (overdistribution of) net income of subsidiaries	1,880			13,849			(11,646		)
Equity interest in earnings of other investment	—			—			(1		)
Accretion of acquisition fair value adjustments	(8		)	(84		)	(126		)
Decrease in prepaid income taxes	1,529			417			160
Decrease in other assets	1,606			119			75
Increase (decrease) in accrued expenses and other liabilities	152			(370		)	(330		)
Net cash provided from operating activities	18,009			31,673			8,944
Cash flows from investing activities:
Distributions from subsidiaries	4,900			75,257			39,394
Repayment of ESOP loan by subsidiary bank	250			250			250
Payment from subsidiary bank for shares vested in recognition and retention plans	2,296			2,590			2,981
Net cash provided from investing activities	7,446			78,097			42,625
Cash flows from financing activities:
Payment of dividends on common stock	(44,055		)	(45,528		)	(46,117		)
Income tax benefit, net, from exercise of non-incentive stock options, payment of dividend equivalent rights, dividend distribution on allocated ESOP shares and vesting of recognition and retention plan shares	1,073			1,814			670
Exercise of stock options	1,214			827			—
Purchase of treasury stock	(372		)	(43,591		)	—
Repayment of subordinated debt	(7,000		)	(5,000		)	—
Net cash used for financing activities	(49,140		)	(91,478		)	(45,447		)
Net increase (decrease) in cash and cash equivalents	(23,685		)	18,292			6,122
Cash and cash equivalents at beginning of year	24,737			6,445			323
Cash and cash equivalents at end of year	$	1,052		$	24,737		$	6,445
Supplemental disclosures of cash flow information:
Cash paid (refund) during the year for income taxes	$	198		$	(311	)	$	36
Interest on subordinated debt	138			844			1,014

F-36

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

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

	2008 Quarters
	Fourth			Third			Second			First
Interest income	$	36,441		$	35,991		$	35,378		$	35,851
Interest expense	16,323			16,649			17,332			18,691
Net interest income	20,118			19,342			18,046			17,160
Provision for credit losses	3,433			3,162			2,579			2,114
Net interest income after provision for credit losses	16,685			16,180			15,467			15,046
Losses on write-downs and sales of securities, net	—			(1,600		)	—			(1,249		)
Other non-interest income	1,022			958			1,123			994
Amortization of identified intangible assets	(438		)	(438		)	(438		)	(438		)
Other non-interest expense	(10,583		)	(10,719		)	(9,997		)	(9,865		)
Income before income taxes and minority interest	6,686			4,381			6,155			4,488
Provision for income taxes	1,926			2,567			2,417			1,748
Netincome before minority interest	4,760			1,814			3,738			2,740
Minority interest in earnings of subsidiary	30			63			64			46
Net income	$	4,730		$	1,751		$	3,674		$	2,694
Earnings per share:
Basic	$	0.08		$	0.03		$	0.06		$	0.05
Diluted	0.08			0.03			0.06			0.05

	2007 Quarters
	Fourth			Third			Second			First
Interest income	$	37,035		$	36,843		$	36,097		$	35,567
Interest expense	19,136			18,846			18,046			17,434
Net interest income	17,899			17,997			18,051			18,133
Provision for credit losses	3,023			1,503			1,107			1,249
Net interest income after provision for credit losses	14,876			16,494			16,944			16,884
Gains on securities, net	47			—			—			—
Other non-interest income	1,039			927			1,281			1,049
Amortization of identified intangible assets	(504		)	(503		)	(504		)	(503		)
Other non-interest expense	(9,228		)	(9,892		)	(9,722		)	(9,327		)
Income before income taxes and minority interest	6,230			7,026			7,999			8,103
Provision for income taxes	2,479			2,711			3,103			3,118
Netincome before minority interest	3,751			4,315			4,896			4,985
Minority interest in earnings of subsidiary	51			66			44			44
Net income	$	3,700		$	4,249		$	4,852		$	4,941
Earnings per share:
Basic	$	0.06		$	0.07		$	0.08		$	0.08
Diluted	0.06			0.07			0.08			0.08

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 27, 2009, with respect to the consolidated balance sheets of Brookline Bancorp, Inc. and subsidiaries as of December 31, 2008 and 2007, 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, 2008 and the effectiveness of Brookline Bancorp, Inc.’s internal control over financial reporting as of December 31, 2008, which reports appear in the December 31, 2008 Annual Report on Form 10-K of Brookline Bancorp, Inc.

/s/ KPMG LLP

Boston, Massachusetts

February 27, 2009

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 19, 2009	/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 19, 2009	/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, 2008 (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 19, 2009	/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, 2008 (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 19, 2009	/s/ Paul R. Bechet
Dated	Paul R. Bechet