================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
COMMISSION FILE NUMBER 0-23695
BROOKLINE BANCORP, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3402944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 WASHINGTON STREET, BROOKLINE, MA 02447-0469
(Address of principal executive offices) (Zip Code)
(617) 730-3500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES __X__ NO ___
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the latest practicable date.
Common Stock, $0.01 par value - 27,501,072 shares outstanding as of August
4, 2000.
================================================================================
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
as of June 30, 2000 and December 31, 1999 1
Consolidated Statements of Income for the three months and
six months ended June 30, 2000 and 1999 2
Consolidated Statements of Comprehensive Income for
the three months and six months ended June 30, 2000 and 1999 3
Consolidated Statements of Changes in Stockholders'
Equity for the six months ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risks 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature Page 22
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2000 1999
---------- -----------
(UNAUDITED)
ASSETS
Cash and due from banks................................................ $ 11,996 $ 8,203
Short-term investments................................................. 4,950 9,435
Securities available for sale.......................................... 125,947 128,275
Securities held to maturity (market value of $75,365
and $102,451, respectively).......................................... 75,583 103,434
Restricted equity securities........................................... 6,279 6,279
Loans, excluding money market loan participations...................... 668,735 635,556
Money market loan participations....................................... 24,800 15,400
Allowance for loan losses.............................................. (14,184) (13,874)
------- -------
Net loans......................................................... 679,351 637,082
------- -------
Other investment....................................................... 3,166 3,022
Accrued interest receivable............................................ 5,863 5,811
Bank premises and equipment, net....................................... 3,032 1,535
Other real estate owned, net........................................... 535 707
Deferred tax asset..................................................... 5,435 3,226
Other assets........................................................... 883 325
------- -------
Total assets...................................................... $ 923,020 $ 907,334
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................................................... $ 525,143 $ 512,136
Borrowed funds......................................................... 112,300 108,800
Mortgagors' escrow accounts............................................ 3,751 3,624
Income taxes payable................................................... 1,042 898
Accrued expenses and other liabilities................................. 7,206 7,076
------- -------
Total liabilities................................................. 649,442 632,534
------- -------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
none issued........................................................ - -
Common stock, $.01 par value; 45,000,000 shares authorized,
29,641,500 shares issued.......................................... 296 296
Additional paid-in capital........................................... 140,332 140,355
Retained earnings.................................................... 157,900 150,098
Accumulated other comprehensive income............................... 4,742 7,759
Treasury stock, at cost - 2,140,428 shares
and 1,491,700 shares, respectively................................. (22,498) (16,334)
Unearned compensation - recognition and retention plan............... (1,548) (2,316)
Unallocated common stock held by ESOP - 473,700 shares
and 407,218 shares, respectively.................................... (5,646) (5,058)
--------- ---------
Total stockholders' equity........................................ 273,578 274,800
------- -------
Total liabilities and stockholders' equity........................ $ 923,020 $ 907,334
======= =======
See accompanying notes to the unaudited consolidated financial statements.
1
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
(UNAUDITED)
Interest income:
Loans, excluding money market loan participations........ $ 13,694 $ 11,755 $ 26,883 $23,271
Money market loan participations......................... 378 462 628 967
Debt securities.......................................... 2,728 3,324 5,586 6,613
Marketable equity securities............................. 225 231 484 413
Restricted equity securities............................. 112 94 222 173
Short-term investments................................... 242 117 460 355
-------- -------- -------- ---------
Total interest income................................. 17,379 15,983 34,263 31,792
-------- -------- -------- ---------
Interest expense:
Deposits................................................. 5,529 5,133 10,868 10,273
Borrowed funds........................................... 1,731 1,659 3,335 3,133
-------- -------- -------- ---------
Total interest expense ............................... 7,260 6,792 14,203 13,406
-------- -------- -------- ---------
Net interest income........................................ 10,119 9,191 20,060 18,386
Provision for loan losses.................................. 150 150 300 300
-------- -------- -------- ---------
Net interest income after provision for loan losses... 9,969 9,041 19,760 18,086
-------- -------- -------- ---------
Non-interest income:
Fees and charges......................................... 221 231 423 438
Gains on sales of securities, net........................ 1,801 2,408 4,143 3,598
Other real estate owned income, net...................... 46 56 65 109
Other income............................................. 160 7 231 9
-------- -------- -------- ---------
Total non-interest income............................. 2,228 2,702 4,862 4,154
-------- -------- -------- ---------
Non-interest expense:
Compensation and employee benefits....................... 1,578 1,565 3,164 3,072
Recognition and retention plan........................... 370 1,274 768 1,274
Occupancy............................................... 174 172 361 349
Equipment and data processing............................ 301 291 593 566
Advertising and marketing................................ 179 113 360 225
Internet bank expense.................................... 887 - 1,453 -
Other.................................................... 343 337 818 662
-------- -------- -------- ---------
Total non-interest expense............................ 3,832 3,752 7,517 6,148
-------- -------- -------- ---------
Income before income taxes................................. 8,365 7,991 17,105 16,092
Provision for income taxes................................. 2,903 2,827 6,019 5,745
-------- -------- -------- ---------
Net income............................................ $ 5,462 $ 5,164 $ 11,086 $ 10,347
======== ======== ======== =========
Weighted average common shares
outstanding during the period 26,781,234 28,138,891 26,967,631 28,302,082
========== ========== ========== ==========
Basic and diluted earnings per common share $ 0.20 $ 0.18 $ 0.41 $ 0.36
====== ====== ====== ======
See accompanying notes to the unaudited consolidated financial statements.
2
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(UNAUDITED)
Net income................................................. $ 5,462 $ 5,164 $ 11,086 $ 10,347
----- ----- ------ ------
Other comprehensive income, net of taxes:
Unrealized holding gains................................. 503 2,115 (589) 1,478
Income tax expense (benefit)............................. 180 739 (216) 428
------ ------ --------- --------
Net unrealized holding gains (losses).............. 323 1,376 (373) 1,050
------ ----- --------- -------
Less reclassification adjustment for gains
included in net income:
Realized gains........................................ 1,801 2,408 4,143 3,598
Income tax expense.................................... 659 963 1,499 1,461
------ ----- --------- -------
Net reclassification adjustment.................... 1,142 1,445 2,644 2,137
------ ----- --------- -------
Total other comprehensive income (loss)............ (819) (69) (3,017) (1,087)
------ ----- --------- -------
Comprehensive income....................................... $ 4,643 $ 5,095 $ 8,069 $ 9,260
------ ----- --------- -------
------ ----- --------- -------
See accompanying notes to the unaudited consolidated financial statements.
3
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
UNEARNED UNALLOCATED
ACCUMULATED COMPENSATION- COMMON
ADDITIONAL OTHER RECOGNITION STOCK TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY AND RETENTION HELD BY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME STOCK PLAN ESOP EQUITY
-------- ----------- --------- ------------- -------- --------------- ---------- -------------
Balance at December 31, 1998.... $ 291 $ 134,490 $ 135,282 $ 14,416 $(1,316) $ - $ (4,941) $ 278,222
Net income...................... - - 10,347 - - - - 10,347
Unrealized loss on securities
available for sale, net of
reclassification adjustment.. - - - (1,087) - - - (1,087)
Common stock dividends
of $.10 per share............ - - (2,866) - - - - (2,866)
Treasury stock purchases
(558,200 shares)............. - - - - (6,409) - - (6,409)
Common stock issued in
conjunction with the recognition
and retention plan...........
(546,500 shares)............. 5 5,904 - - - (5,909) - -
Compensation under recognition
and retention plan........... - - - - - 1,274 - 1,274
Common stock acquired by ESOP
(20,000 shares).............. - - - - - - (200) (200)
Common stock held by ESOP
committed to be released
(15,815 shares).............. - (8) - - - - 199 191
-------- ----------- --------- ------------- -------- --------------- ---------- -------------
Balance at June 30, 1999........ $ 296 $ 140,386 $142,763 $ 13,329 $ (7,725) $(4,635) $ (4,942) $279,472
-------- ----------- --------- ------------- -------- --------------- ---------- -------------
-------- ----------- --------- ------------- -------- --------------- ---------- -------------
(Continued)
4
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
UNEARNED UNALLOCATED
ACCUMULATED COMPENSATION- COMMON
ADDITIONAL OTHER RECOGNITION STOCK TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY AND RETENTION HELD BY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME STOCK PLAN ESOP EQUITY
-------- ----------- --------- ------------- -------- --------------- ---------- -------------
Balance at December 31, 1999.... $ 296 $ 140,355 $150,098 $ 7,759 $(16,334) $ (2,316) $ (5,058) $ 274,800
Net income...................... - - 11,086 - - - - 11,086
Unrealized loss on securities
available for sale, net of
reclassification adjustment.. - - - (3,017) - - - (3,017)
Common stock dividends of
$0.12 per share.............. - - (3,284) - - - - (3,284)
Treasury stock purchases
(648,728 shares)............. - - - - (6,164) - - (6,164)
Compensation under recognition
and retention plan........... - - - - - 768 - 768
Common stock acquired by ESOP
(84,386 shares).............. - - - - - - (802) (802)
Common stock held by ESOP
committed to be released
(17,904 shares).............. - (23) - - - - 214 191
-------- ----------- --------- ------------- -------- --------------- ---------- -------------
Balance at June 30, 2000........ $ 296 $ 140,332 $157,900 $ 4,742 $(22,498) $ (1,548) $ (5,646) $ 273,578
-------- ----------- --------- ------------- -------- --------------- ---------- -------------
-------- ----------- --------- ------------- -------- --------------- ---------- -------------
See accompanying notes to the unaudited consolidated financial statements.
5
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
-------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net income........................................................... $11,086 $10,347
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses........................................ 300 300
Compensation under recognition and retention plan................ 768 1,274
Release of ESOP shares........................................... 191 191
Depreciation and amortization.................................... 306 261
Amortization, net of accretion, of securities premiums
and discounts.................................................. 591 937
Accretion of deferred loan origination fees
and unearned discounts......................................... (245) (275)
Net gains from sales of securities available for sale............ (4,143) (3,598)
Net gains from sales of other real estate owned.................. (28) -
Equity interest in earnings of other investment.................. (144) -
Deferred income taxes............................................ (494) (719)
(Increase) decrease in:
Accrued interest receivable.................................... (52) 152
Other assets................................................... (558) 12
Increase (decrease) in:
Income taxes payable........................................... 144 (1,963)
Accrued expenses and other liabilities......................... 130 471
-------- ---------
Net cash provided by operating activities.................... 7,852 7,390
-------- ---------
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale....... 4,666 3,673
Proceeds from redemptions and maturities of securities
available for sale................................................. 38,912 26,000
Proceeds from redemptions and maturities of securities
held to maturity................................................... 27,328 18,960
Purchase of securities available for sale............................ (41,907) (34,420)
Purchase of securities held to maturity.............................. - (17,720)
Purchase of Federal Home Loan Bank of Boston stock................... - (984)
Purchase of other restricted equity securities....................... - (31)
Net increase in loans................................................ (43,302) (55,096)
Proceeds from sales of participations in loans....................... 10,378 4,750
Purchase of bank premises and equipment.............................. (1,792) (406)
Capital expenditures on other real estate owned...................... - (12)
Proceeds from sales of other real estate owned....................... 189 13
-------- ---------
Net cash used for investing activities....................... (5,528) (55,273)
-------- ---------
(Continued)
6
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
-------- ---------
(UNAUDITED)
Cash flows from financing activities:
Increase in demand deposits and NOW, savings and
money market savings accounts...................................... $ 10,028 $ 23,036
Increase (decrease) in certificates of deposit....................... 2,979 (7,831)
Proceeds from Federal Home Loan Bank of Boston advances 14,900 27,500
Repayment of Federal Home Loan Bank of Boston advances (11,400) (12,550)
Increase in mortgagors' escrow accounts.............................. 127 125
Purchase of common stock for ESOP.................................... (802) (200)
Purchase of treasury stock........................................... (6,164) (6,409)
Payment of dividends on common stock................................. (3,284) (2,866)
------- -------
Net cash provided by financing activities...................... 6,384 20,805
------- -------
Net increase (decrease) in cash and cash equivalents 8,708 (27,078)
Cash and cash equivalents at beginning of period 33,038 73,617
------- -------
Cash and cash equivalents at end of period............................. $ 41,746 $ 46,539
====== ======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds............................ $ 14,199 $ 13,356
Income taxes....................................................... 6,350 8,419
See accompanying notes to the unaudited consolidated financial statements.
7
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and the instructions for Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation have been included. Results for the six months ended June
30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
(2) REORGANIZATION AND STOCK OFFERING (DOLLARS IN THOUSANDS)
Brookline Bancorp, Inc. (the "Company") is a Massachusetts corporation
that was organized in November 1997 at the direction of the Board of
Trustees of Brookline Savings Bank (the "Bank") for the purpose of
acquiring all of the capital stock of the Bank upon completion of the
Bank's reorganization from a mutual savings bank into a mutual holding
company structure. As part of the reorganization, the Company offered
for sale 47% of the shares of its common stock in an offering fully
subscribed for by eligible depositors of the Bank (the "Offering"). The
remaining 53% of the Company's shares of common stock were issued to
Brookline Bancorp, MHC (the "MHC"), a state-chartered mutual holding
company incorporated in Massachusetts. The reorganization and Offering
were completed on March 24, 1998.
Completion of the Offering resulted in the issuance of 29,095,000 shares
of common stock, 15,420,350 shares (53%) of which were issued to the MHC
and 13,674,650 shares (47%) of which were sold to eligible depositors of
the Bank at $10.00 per share. Net proceeds from the Offering amounted to
$134,790.
(3) EMPLOYEE STOCK OWNERSHIP PLAN (DOLLARS IN THOUSANDS)
On March 24, 1998, the Board of Directors of the Bank approved an
employee stock ownership plan (the "ESOP"). All employees meeting age
and service requirements are eligible to participate in the ESOP. The
ESOP is authorized to purchase up to 4% of the common stock sold in the
Offering, or 546,986 shares, in the open market and to borrow up to
$7,500 from the Company to finance the purchase of such shares. The loan
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 and dividends
on unallocated shares of Company stock held by the ESOP, subject to IRS
limitations.
Through June 30, 2000, the ESOP purchased 546,986 shares of common stock
in the open market at an aggregate cost of $6,598. For the six months
ended June 30, 2000 and 1999, $174 and $183, respectively, were charged
to compensation and employee benefits expense based on the commitment to
release 17,904 and 15,815 shares, respectively, to eligible employees.
8
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(4) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of shares outstanding during the periods
presented. Diluted earnings per share gives effect to all dilutive
potential shares resulting from options that were outstanding during the
periods presented.
The components of basic and diluted earnings per share for the three
months and six months ended June 30, 2000 and 1999 are as follows:
WEIGHTED NET INCOME
NET INCOME AVERAGE SHARES PER SHARE
----------------- --------------------- ------------------
2000 1999 2000 1999 2000 1999
(IN THOUSANDS)
Three months
ENDED JUNE 30
Basic $ 5,462 $ 5,164 26,781,234 28,138,891 $ 0.20 $ 0.18
Effect of dilutive
stock options - - - 3,346 - -
------- -------- ---------- ---------- ------- -------
Dilutive $ 5,462 $ 5,164 26,781,234 28,142,237 $ 0.20 $ 0.18
------- -------- ---------- ---------- ------- -------
------- -------- ---------- ---------- ------- -------
Six months
ENDED JUNE 30
Basic $11,086 $10,347 26,967,631 28,302,082 $ 0.41 $ 0.36
Effect of dilutive
stock options - - - 1,682 - -
------- -------- ---------- ---------- ------- -------
Dilutive $11,086 $10,347 26,967,631 28,303,764 $ 0.41 $ 0.36
(5) ACCUMULATED OTHER COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
Accumulated other comprehensive income is comprised entirely of
unrealized gains on securities available for sale, net of income taxes.
At June 30, 2000 and December 31, 1999, such taxes amounted to $2,759,
and $4,474, respectively.
(6) COMMITMENTS AND SWAP AGREEMENT (DOLLARS IN THOUSANDS)
At June 30, 2000, the Company had outstanding commitments to originate
loans of $72,956, $58,788 of which were commercial real estate and
multi-family mortgage loans. Unused lines of credit available to
customers were $10,978, $9,583 of which were equity lines of credit.
Effective April 14, 1998, the Bank entered into an interest-rate swap
agreement with a third-party that matures April 14, 2005. The notional
amount of the agreement is $5,000. Under this agreement, each quarter
the Bank pays interest on the notional amount at an annual fixed rate of
5.9375% and receives from the third-party interest on the notional
amount at the floating three month U.S. dollar LIBOR rate. The Bank
entered into this transaction to match more closely the repricing of its
assets and liabilities and to reduce its exposure to increases in
interest rates. The net interest income received (expense paid) for the
six months ended June 30, 2000 and 1999 was $5 and $(22), respectively.
9
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(7) DIVIDEND DECLARATION
On July 20, 2000, the Board of Directors of the Company approved and
declared a regular quarterly cash dividend of $.06 per share of common
stock to shareholders of record as of July 31, 2000 and payable on
August 16, 2000.
(8) 1999 STOCK OPTION PLAN AND 1999 RECOGNITION AND RETENTION PLAN
At the annual meeting of stockholders on April 15, 1999, the
stockholders approved the Company's 1999 Stock Option Plan (the "Stock
Option Plan") and the 1999 Recognition and Retention Plan (the "RRP").
Under the Stock Option Plan, 1,367,465 shares of the Company's common
stock were reserved for issuance to officers, 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 expires or is terminated unexercised will again be available for
issuance under the Stock Option Plan. On April 19, 1999, 1,265,500
options were awarded to officers and non-employee directors of the
Company at an exercise price of $10.8125 per share, the fair market
value of the common stock of the Company on that date. Of the total
options awarded, 410,460 options are incentive stock options and 855,040
options are non-qualified stock options. Options awarded vest over
periods ranging from less than six months through five years. As of June
30, 2000, 671,300 options have vested, 19,000 options were forfeited and
none were exercised. 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 the full
upon the happening of such event and shall remain exercisable for a one
year period. The Company is accounting for the Stock Option Plan by
using the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the RRP, 546,986 shares of the Company's common stock were
reserved for issuance as restricted stock awards to officers, employees
and non-employee directors in recognition of prior service and as an
incentive for such individuals to remain with 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 RRP. On April 19, 1999, 546,500 shares were awarded
to officers and non-employee directors of the Company. The shares vest
over varying time periods ranging from six months up to eight years. In
the event a recipient ceases to maintain continuous service with the
Company by reason of normal retirement, death or disability, or
following a change in control, RRP shares still subject to restrictions
will vest and be free of such restrictions. In 1999, 227,125 shares
vested, 22,332 vested in the first half of 2000 and 179,250 shares are
scheduled to vest on October 19, 2000; 3,500 shares were forfeited in
2000. Expense is recognized for shares awarded over the vesting period
at the fair market value of the shares on the date they were awarded, or
$10.8125 per share.
10
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
Assuming all shares vest according to the terms of the awards, the Company's
pre-tax operating expenses have been or will be charged by the following amounts
in the periods indicated (in thousands):
Year 1999
---------
Second quarter (actual expense) $ 1,274
Third quarter (actual expense) 1,637
Fourth quarter (actual expense) 682
------
3,593
Year 2000
---------
First quarter (actual expense) 398
Second quarter (actual expense) 370
Third quarter 364
Fourth quarter 114
------
1,246
Year 2001 167
Year 2002 167
Year 2003 167
Year 2004 161
Year 2005 158
Year 2006 158
Year 2007 48
-------
$ 5,865
-------
-------
(9) ESTABLISHMENT OF A NEW INTERNET BANK SUBSIDIARY (DOLLARS IN THOUSANDS)
On April 12, 2000, the Company received regulatory approval for
Lighthouse Bank ("Lighthouse") to commence operations as New England's
first-chartered internet-only bank. In connection with the legal
formation of Lighthouse, the Company made a $25,000 capital investment
in Lighthouse at the beginning of May 2000. Lighthouse commenced doing
business with the public in the last week of June 2000. Its activities
through June 30, 2000 were concentrated primarily on obtaining and
training qualified personnel, installation of computer equipment,
establishment of operating policies and procedures, and development of
marketing strategies. Expenses incurred prior to the legal
incorporation of Lighthouse (April 27, 2000) are considered to have
been start-up expenses. A summary of Lighthouse expenses through June
30, 2000 is as follows:
START-UP EXPENSES
EXPENSES -----------------------------------------
TWO MONTHS ENDED FOUR MONTHS ENDED SECOND HALF
JUNE 30, 2000 APRIL 30, 2000 OF 1999
-------------------- -------------------- ----------------
Compensation and employee benefits $ 287 $ 409 $ 290
Occupancy 46 105 104
Equipment and data processing 62 45 15
Advertising and marketing 276 97 44
Professional services - 58 182
Other 36 32 40
---- ---- ----
$ 707 $ 746 $ 675
---- ---- ----
---- ---- ----
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 (the
"Bank") upon completion of the Bank's reorganization from a mutual savings bank
into a mutual holding company structure. As part of the reorganization, the
Company offered for sale 47% of the shares of its common stock in an offering
fully subscribed for by eligible depositors of the Bank (the "Offering"). The
remaining 53% of the Company's shares of common stock were issued to Brookline
Bancorp, MHC, a state-chartered mutual holding company incorporated in
Massachusetts. The reorganization and Offering were completed on March 24, 1998.
This quarterly report on Form 10-Q contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those contemplated by such forward-looking statements.
These important factors include, without limitation, the Bank's continued
ability to originate quality loans, fluctuation of interest rates, real estate
market conditions in the Bank's lending areas, general and local economic
conditions, the Bank's continued ability to attract and retain deposits, the
Company's ability to control costs, new accounting pronouncements and changing
regulatory requirements.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND DECEMBER 31, 1999
Total assets increased $15.7 million, or 1.7%, from $907.3 million at
December 31, 1999 to $923.0 million at June 30, 2000. Excluding money market
loan participations, the loan portfolio increased $33.2 million, or 5.2%, from
$635.6 million at December 31, 1999 to $668.7 million at June 30, 2000. Growth
took place primarily in the commercial real estate mortgage loan sector of the
portfolio ($14.6 million, or 6.8%), the one-to-four family residential mortgage
loan sector ($7.5 million, or 10.0%) and the multi-family mortgage loan sector
($5.6 million, or 1.9%). Money market loan participations amounted to $24.8
million at June 30, 2000 compared to $15.4 million at December 31, 1999.
Generally, the participations represent purchases of a portion of loans to
national companies and organizations originated and serviced by money center
banks that mature between one day and three months. The Company views such
participations as an alternative investment to slightly lower yielding
short-term investments.
Short-term investments, securities available for sale and securities held to
maturity declined from $256.5 million at December 31, 1999 to $231.3 million at
June 30, 2000. Proceeds resulting from the decline were used to fund part of the
loan growth and the repurchase of Company stock.
Total deposits were $525.1 million at June 30, 2000 compared to $512.1
million at December 31, 1999, an increase of $13.0 million, or 2.5%. Of this
growth, $7.7 million was in money market savings accounts, $3.0 million in
certificates of deposit and $1.6 million in demand checking accounts. The
increases in money market savings and demand checking accounts resulted, in
part, from increased marketing efforts and branch divestitures by other
financial institutions. Certificate of deposit balances are more rate sensitive
than transaction-related deposit accounts. Six separate increases in the federal
funds rate by the Federal Reserve since June 1999 seem to have prompted
depositors to place their funds in accounts with shorter maturities or immediate
availability. Depending on the frequency and extent of future rate changes,
depositors might place more of their funds in longer-term, higher
interest-bearing certificates of deposit. Such a development could have a
negative effect on the Company's profitability.
Total stockholders' equity declined from $274.8 million at December 31, 1999
to $273.6 million at June 30, 2000
12
as a result of outflows for stock repurchases and cash dividends to stockholders
exceeding additions to equity from operating results. The Company purchased
733,114 shares of its common stock at an aggregate cost of $7.0 million, or
$9.50 per share. As a result of such purchases, the Company completed its first
stock repurchase program (1,454,750 shares), its purchase of shares for the ESOP
(546,986 shares) and commenced purchasing shares as part of a new repurchase
plan approved by the Company's regulators on March 10, 2000. Under the new plan,
610,995 shares can be purchased, 298,114 shares of which were purchased through
June 30, 2000. As of June 30, 2000, 2,687,414 shares have been purchased since
becoming a public company at a total cost of $29.1 million, or $10.83 per share.
Unrealized gains on securities available for sale are reported as accumulated
other comprehensive income. Such gains amounted to $7.5 million ($4.7 million on
an after-tax basis) at June 30, 2000 and $12.2 million ($7.8 million on an
after-tax basis) at December 31, 1999. The net decrease is after realization of
$4.1 million ($2.6 million on an after-tax basis) of gains from sales of
marketable equity securities during the first half of 2000.
NON-PERFORMING ASSETS, RESTRUCTURED LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table sets forth information regarding non-performing assets,
restructured loans and the allowance for loan losses:
JUNE 30 DECEMBER 31,
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
Non-accrual loans $ - $ -
Other real estate owned, net of allowance
for losses of $86 and $86, respectively 535 707
------- -------
Total non-performing assets $ 535 $ 707
======= =======
Restructured loans $ - $ -
======== =======
Allowance for loan losses $ 14,184 $ 13,874
====== ======
Allowance for loan losses as a percent
of total loans 2.05% 2.13%
Allowance for loan losses as a percent
of total loans, excluding money market
participation loans 2.12 2.18
Non-accrual loans as a percent of total loans - -
Non-performing assets as a percent of
total assets 0.06 0.08
In addition to identifying non-performing loans, the Company identifies loans
that are characterized as "impaired" pursuant to generally accepted accounting
principles. The definition of "impaired loans" is not the same as the definition
of "non-accrual loans," although the two categories tend to overlap. Impaired
loans amounted to $107,000 at June 30, 2000 and $109,000 at December 31, 1999.
None of the impaired loans at those dates required a specific allowance for
impairment due primarily to prior charge-offs and the sufficiency of collateral
values.
During the six months ended June 30, 2000, recoveries of loans previously
charged off amounted to $10,000 and there were no loan charge-offs. Despite net
loan recoveries and no non-performing loans at June 30, 2000, the Company
increased its allowance for loan losses by providing $300,000 as a charge to
earnings in the first half of 2000. Management deemed it prudent to increase the
allowance in light of the $33.2 million increase in net loans outstanding
(exclusive of money market loan participations in the first half of 2000), more
than half of which occurred in the higher risk categories of multi-family and
commercial real estate mortgage loans.
13
While management believes that, based on information currently available, the
allowance for loan losses is sufficient to cover losses inherent in the
Company's loan portfolio at this time, no assurance can be given that the level
of allowance will be sufficient to cover future loan losses or that future
adjustments to the allowance will not be necessary if economic and/or other
conditions differ substantially from the economic and other conditions
considered by management in evaluating the adequacy of the current level of the
allowance.
In March 1999, four federal banking agencies and the Securities and Exchange
Commission announced they had formed a working group to come up with new
guidelines for the documentation, disclosure and reporting of bank loan loss
reserves because of "continued uncertainty among financial institutions as to
the expectations of the banking and securities regulators" on how banks should
calculate and report loan loss reserves. During 2000, it is expected that the
working group will issue guidance regarding (1) the procedures necessary for a
reasoned assessment of losses inherent in a loan portfolio, (2) documentation
that should exist to support the allowance and (3) enhanced disclosure of credit
loss allowances, including changes in risk factors and asset quality that affect
allowances for credit losses. It is not possible at this time to anticipate what
effect, if any, guidelines developed by the working group will have on the
financial condition or operating results of the Company.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND
1999
GENERAL
Operating results are primarily dependent on the Company's net interest
income, which is the difference between the interest earned on the Company's
loan and investment portfolios and the interest paid on deposits and borrowings.
Operating results are also affected by provisions for loan losses, the level of
income from non-interest sources such as service fees and sales of investment
securities and other assets, operating expenses and income taxes. Operating
results are also significantly affected by general economic conditions,
particularly changes in interest rates, as well as government policies and
actions of regulatory authorities.
Net income for the three months ended June 30, 2000 was $5.5 million ($0.20
per share) compared to $5.2 million ($0.18 per share) for the three months ended
June 30, 1999, an improvement of $298,000, or 5.8% (11.1% on a per share basis).
The higher rate of per share improvement resulted from less shares outstanding
due to stock repurchases. Basic and diluted earnings per share are the same in
both the three month and six month periods ended June 30, 2000 and 1999. The
2000 and 1999 quarterly periods included gains from sales of marketable equity
securities of $1.8 million ($1.1 million on an after-tax basis, or $0.04 per
share) and $2.4 million ($1.4 million on an after-tax basis, or $0.05 per
share), respectively, and expense related to the recognition and retention plan
("RRP") approved by stockholders of $370,000 ($215,000 on an after-tax basis, or
$0.01 per share) and $1.3 million ($823,000 on an after-tax basis, or $0.03 per
share), respectively.
The 2000 quarter also included $641,000 ($365,000 on an after-tax basis, or
$0.01 per share) of loss related to the start-up of Lighthouse Bank
("Lighthouse"), New England's first-chartered internet-only bank. In connection
with the legal formation of Lighthouse, the Company made a $25 million capital
investment in Lighthouse at the beginning of May 2000. Lighthouse commenced
doing business with the public in the last week of June 2000. See note 9 to the
unaudited consolidated financial statements on page 11 herein for more specific
information about expenses incurred by Lighthouse in its formation stage through
June 30, 2000.
Excluding securities gains, the expense for the RRP and Lighthouse's loss,
and adding back foregone income on the Company's $25 million investment in
Lighthouse, net operating income was $5.1 million ($0.19 per share) in the
second quarter of 2000 compared to $4.5 million ($0.16 per share) in the second
quarter of 1999, an increase of $527,000, or 11.6% (18.8% on a per share basis).
Improved quarterly operating results were derived primarily from an increase
in interest rate spread from 2.62% in the 1999 quarter to 3.03% in the 2000
quarter and a $13.9 million, or 1.6%, increase in average earning assets between
the two periods. The higher interest rate spread resulted from an increase in
the percent of average loans outstanding to total average earning assets from
65% in the 1999 quarter to 73% in the 2000 quarter and higher
14
yields on assets. Excluding Lighthouse and RRP expenses, the Company's operating
efficiency ratio improved from 26.1% in the 1999 quarter to 24.4% in the 2000
quarter.
AVERAGE BALANCE SHEETS AND INTEREST RATES
The following table sets forth certain information relating to the Company
for the three months ended June 30, 2000 and 1999. The average yields and costs
are derived by dividing interest income or interest expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown. Average balances are derived from daily
average balances. The yields and costs include fees which are considered
adjustments to yields.
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------
2000 1999
-------------------------------- ------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST(1) COST BALANCE INTEREST(1) COST
--------- ------------ --------- --------- ------------ -------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Short-term investments..................... $ 15,978 $ 243 6.10% $ 9,896 $ 117 4.74%
Debt securities (2)........................ 180,119 2,727 6.06 228,542 3,324 5.82
Equity securities (2)...................... 30,467 419 5.50 40,359 409 4.04
Mortgage loans (3)(4)...................... 634,943 13,172 8.30 567,221 11,464 8.08
Money market loan participations........... 23,063 378 6.56 37,060 462 4.99
Other commercial loans (3)................. 24,487 509 8.31 12,166 248 8.15
Consumer loans (3)......................... 1,972 49 9.94 1,840 43 9.35
-------- ------- -------- -------
Total interest-earning assets........... 911,029 17,497 7.68 897,084 16,067 7.16
------- ----- ------- ----
Allowance for loan losses................... (14,075) (13,296)
Non-interest earning assets................. 26,152 16,931
-------- --------
Total assets............................ $923,106 $900,719
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:..................................
NOW accounts............................ $ 47,151 144 1.22% $ 44,510 136 1.22%
Savings accounts (5).................... 12,405 68 2.19 13,238 73 2.21
Money market savings accounts........... 207,631 2,033 3.92 187,864 1,823 3.88
Certificate of deposit accounts......... 243,192 3,285 5.40 242,818 3,101 5.11
-------- ------- -------- ------
Total deposits........................ 510,379 5,530 4.33 488,430 5,133 4.20
Borrowed funds............................. 114,773 1,730 6.03 109,988 1,659 6.03
-------- ------- -------- ------
Total interest bearing liabilities.... 625,152 7,260 4.65 598,418 6,792 4.54
------- -------- ------ ----
Non-interest-bearing demand
checking accounts......................... 13,562 12,548
Other liabilities........................... 11,212 11,543
-------- --------
Total liabilities..................... 649,926 622,509
Stockholders' equity........................ 273,180 278,210
-------- --------
Total liabilities and
stockholders' equity........... $923,106 $900,719
-------- --------
-------- --------
Net interest income (tax equivalent
basis)/interest rate spread (6)............ 10,237 3.03% 9,275 2.62%
==== ====
Less adjustment of tax exempt income........ 82 84
------- ------
Net interest income (4)..................... $10,155 $9,191
======= ======
Net interest margin (7)..................... 4.49% 4.14%
==== ====
- --------------------
(1) Tax exempt income on equity securities is included on a tax equivalent
basis.
(2) Average balances include unrealized gains on securities available for sale.
Equity securities include marketable equity securities (preferred and common
stocks) and restricted equity securities.
(3) Loans on non-accrual status are included in average balances.
(4) Interest income in the 2000 period is increased by $36 for an interest rate
adjustment on a loan that relates to prior periods.
(5) Savings accounts include interest-bearing mortgagors' escrow accounts.
(6) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(7) Net interest margin represents net interest income (tax equivalent
basis) divided by average interest-earning assets.
15
INTEREST INCOME
Interest income on loans, excluding money market loan participations, was
$13.7 million in the 2000 quarter compared to $11.8 million in the 1999 quarter,
an increase of $1.9 million, or 16.5%. The additional income resulted from an
increase in average loans outstanding of $80.2 million, or 13.8%, between the
two quarterly periods. The average rate earned on loans increased from 8.09% in
the 1999 quarter to 8.30% in the 2000 quarter. The rate improvement was
attributable primarily to the six separate increases in the federal funds rate
by the Federal Reserve since June 1999. Such rate increases affected pricing for
new loans as well as that part of the loan portfolio underwritten on an
adjustable rate basis.
The average balance invested in money market loan participations during the
three months ended June 30, 2000 and 1999 were $23.1 million and $37.1 million,
respectively, and the yields earned on those balances were 6.56% and 4.99%,
respectively. Interest income on debt securities declined 18.0% from $3.3
million in the 1999 quarter to $2.7 million in the 2000 quarter as a result of a
$48.4 million, or 21.2%, reduction in the average balances invested in debt
securities between the two periods. Yields earned on debt securities improved
from 5.82% in the 1999 quarter to 6.06% in the 2000 quarter. Funds derived from
the decline in the average balances of debt securities and money market loan
participations were used to fund part of the loan growth. The improved
investment yields resulted from continuation of the Company's emphasis on
purchasing investment securities with relatively short maturities of two to
three years.
INTEREST EXPENSE
Interest expense on deposits was $5.5 million for the three months ended June
30, 2000, a 7.7% increase from the $5.1 million expended for the three months
ended June 30, 1999. Most of the increase was due to a 4.5% increase in the
average balance of interest-bearing deposits from $488.4 million in the 1999
quarter to $510.4 million in the 2000 quarter. The average paid on those
deposits rose from 4.20% in the 1999 quarter to 4.33% in the 2000 quarter due in
part to the actions of the Federal Reserve previously mentioned herein. Further
initiatives by the Federal Reserve similar to those taken since June 1999
inevitably will cause interest rates paid on deposits and borrowed funds to rise
beyond existing levels. Such a development could have a negative effect on the
Company's profitability.
Average borrowings from the Federal Home Loan Bank of Boston ("FHLB")
increased from $110.0 million in the 1999 quarter to $114.8 million in the 2000
quarter. The average rate paid on those balances was 6.03% for each of the
quarters. Borrowings from the FHLB are usually obtained as part of the Company's
management of interest rate risk.
NON-INTEREST INCOME
Gains on sales of marketable equity securities during the three months ended
June 30, 2000 and 1999 were $1.8 million and $2.4 million, respectively.
Marketable equity securities are held by the Company primarily for capital
appreciation and not for trading purposes. For each of the past five quarters,
the Company has realized after-tax gains from sales of marketable equity
securities in the range of $1.1 million to $1.5 million. These gains have
effectively offset the expenses incurred in establishing Lighthouse as an
operating entity and the expense of the RRP. Continuation of securities gains in
the range realized during the past several quarters cannot be sustained
indefinitely. Actual gains in the future, if any, will be highly dependent on
factors outside the control of the Company and, accordingly, cannot be assured.
The increase in other non-interest income from $7,000 in the 1999 quarter to
$160,000 in the 2000 quarter resulted primarily from $102,000 of income
representing the Company's 30.5% equity interest in the earnings of Eastern
Funding LLC, a company specializing in the financing of coin operated laundry
and dry cleaning equipment in the greater metropolitan New York area and
selected other locations in the Northeast, and $47,000 of profit from
disposition of a property tied to a particular lending arrangement.
16
NON-INTEREST EXPENSE
Expense related to the RRP approved by stockholders on April 15, 1999 (see
note 8 to the unaudited consolidated financial statements on pages 10 and 11
herein) amounted to $370,000 in the 2000 quarter and $1.3 million in the 1999
quarter. RRP expense is allocated to the periods over which the underlying
shares vest. The 2000 quarter also included $887,000 of expense related to
Lighthouse. Excluding RRP and Lighthouse expenses, total non-interest expense
increased $97,000, or 3.9%, from $2.5 million in the 1999 quarter to $2.6
million in the 2000 quarter. Much of the increase was attributable to expanded
marketing efforts (up $67,000); all other areas of operating expenses remained
stable.
INCOME TAXES
The effective rate of income taxes was 34.7% in the 2000 quarter compared to
35.4% in the 1999 quarter. The rate of state income taxes was low in both
quarters because of the existence of a real estate investment subsidiary and
utilization of investment security subsidiaries.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
GENERAL
Net income for the six months ended June 30, 2000 was $11.1 million ($0.41
per share) compared to $10.3 million ($0.36 per share) for the six months ended
June 30, 1999, an improvement of $739,000, or 7.1% (13.9% on a per share basis).
The 2000 and 1999 periods included gains from sales of marketable equity
securities of $4.1 million ($2.6 million on an after-tax basis, or $0.10 per
share) and $3.6 million ($2.1 million on an after-tax basis, or $0.07 per
share), respectively, and RRP expense of $768,000 ($446,000 on an after-tax
basis, or $0.02 per share) and $1.3 million ($823,000 on an after-tax basis, or
$0.03 per share), respectively. The 2000 period also included $1.2 million
($734,000 on an after-tax basis, or $0.03 per share) of net loss related to
Lighthouse.
Excluding securities gains, the expense for the RRP and Lighthouse's net
loss, and adding back foregone income on the Company's $25 million investment in
Lighthouse, net operating income was $9.8 million ($0.36 per share) in the 2000
period compared to $9.0 million ($0.32 per share) in the 1999 period, an
increase of $758,000, or 8.4% (12.5% on a per share basis).
The improvement in operating results for the six month periods were for the
same reasons that caused the quarterly improvement: increased interest rate
spread (from 2.63% to 3.02%), a $16.5 million, or 1.9%, increase in average
earning assets, an increase in the percent of average loans outstanding to total
average earning assets from 64% to 72%, higher asset yields and a better
operating efficiency ratio (25.5% versus 25.7%).
17
AVERAGE BALANCE SHEETS AND INTEREST RATES
The following table sets forth certain information relating to the Company
for the six months ended June 30, 2000 and 1999. Average balances are derived
from daily average balances. The yields and costs include fees which are
considered adjustments to yields.
SIX MONTHS ENDED JUNE 30,
2000 1999
------------------------------- -----------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST(1) COST BALANCE INTEREST(1) COST
--------- ----------- -------- --------- ----------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Short-term investments..................... $ 15,606 $ 460 5.90% $ 14,766 $ 355 4.81%
Debt securities (2)........................ 187,424 5,587 5.96 227,637 6,612 5.81
Equity securities (2)...................... 31,352 881 5.62 37,683 737 3.91
Mortgage loans (3)(4)...................... 625,456 25,815 8.25 559,046 22,755 8.14
Money market loan participations........... 20,003 628 6.28 38,459 967 5.03
Other commercial loans (3)................. 24,532 997 8.13 10,406 431 8.28
Consumer loans (3)......................... 1,942 95 9.78 1,805 85 9.42
-------- ------- -------- -------
Total interest-earning assets........... 906,315 34,463 7.61 889,802 31,942 7.18
------- ----- ------- ----
Allowance for loan losses.................... (13,993) (13,222)
Non-interest earning assets.................. 23,917 16,788
-------- --------
Total assets............................ $916,239 $893,368
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:..................................
NOW accounts............................ $ 47,363 $ 289 1.22% $ 43,407 $ 268 1.23%
Savings accounts (5).................... 12,295 135 2.20 13,123 145 2.21
Money market savings accounts........... 205,258 4,003 3.90 183,722 3,542 3.86
Certificate of deposit accounts......... 243,018 6,443 5.30 245,085 6,318 5.16
-------- ------- -------- ------
Total deposits........................ 507,934 10,870 4.28 485,337 10,273 4.23
Borrowed funds............................. 111,157 3,333 6.00 103,875 3,133 6.03
-------- ------- -------- ------
Total interest bearing liabilities.... 619,091 14,203 4.59 589,212 13,406 4.55
------- ---- ------ ----
Non-interest-bearing demand
checking accounts......................... 13,042 12,066
Other liabilities............................ 10,839 13,641
-------- --------
Total liabilities..................... 642,972 614,919
Stockholders' equity......................... 273,267 278,449
-------- --------
Total liabilities and
stockholders' equity................ $ 916,239 $ 893,368
======== ========
Net interest income (tax equivalent
basis)/interest rate spread (6)............ 20,260 3.02% 18,536 2.63%
==== ====
Less adjustment of tax exempt income......... 175 150
------- ------
Net interest income (4)...................... $20,085 $18,386
======= ======
Net interest margin (7)...................... 4.47% 4.17%
==== ====
- --------------------
(1) Tax exempt income on equity securities is included on a tax equivalent
basis.
(2) Average balances include unrealized gains on securities available for sale.
Equity securities include marketable equity securities (preferred and
common stocks) and restricted equity securities.
(3) Loans on non-accrual status are included in average balances.
(4) Interest income in the 2000 period is increased by $24 for an interest
rate adjustment on a loan that relates to prior periods.
(5) Savings accounts include interest-bearing mortgagors' escrow accounts.
(6) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(7) Net interest margin represents net interest income (tax equivalent basis)
divided by average interest-earning assets.
INTEREST INCOME
Interest income on loans, excluding money market loan participations, was
$26.9 million in the 2000 period compared to $23.3 million in the 1999 period,
an increase of $3.6 million, or 15.5%. The additional income
18
resulted from an increase in average loans outstanding of $80.7 million, or
14.1%, between the two six month periods. The average rate earned on loans
increased from 8.15% in the 1999 period to 8.25% in the 2000 period. The rate
improvement was attributable to the same reasons that caused the increase
between the 2000 and 1999 quarterly periods.
The average balances invested in money market loan participations during the
six months ended June 30, 2000 and 1999 were $20.0 million and $38.5 million,
respectively, and the yields earned on those balances were 6.28% and 5.03%,
respectively. Interest income on debt securities declined 15.5% from $6.6
million in the 1999 period to $5.6 million in the 2000 period as a result of a
$40.2 million, or 17.7%, reduction in the average balances invested in debt
securities between the two periods. Yields earned on debt securities improved
from 5.81% in the 1999 period to 5.96% in the 2000 period. The decline in the
average balances of debt securities and money market loan participations and the
improved yields on those assets were for the same reasons as those given for the
changes between the 2000 and 1999 quarterly periods.
INTEREST EXPENSE
Interest expense on deposits was $10.9 million for the six months ended June
30, 2000, a 5.8% increase from the $10.3 million expended for the six months
ended June 30, 1999. The increase was due to a $22.6 million, 4.7%, growth in
the average balance of interest-bearing deposits between the two periods and a
rise in the average rate paid on such deposits from 4.23% in the 1999 period to
4.28% in the 2000 period.
Average borrowings from the FHLB increased from $103.9 million in the 1999
period to $111.2 million in the 2000 period. The average rates paid on those
balances were 6.03% and 6.00%, respectively.
NON-INTEREST INCOME
Gains on sales of marketable equity securities were $4.1 million in the 2000
period and $3.6 million in the 1999 period. The decline in income from other
real estate owned between the 1999 and 2000 periods was caused by the sale of a
foreclosed property in the second half of 1999 that had previously generated
rental income in the first half of 1999. The increase in other non-interest
income from $9,000 in the 1999 period to $231,000 in the 2000 period resulted
primarily from $157,000 of income representing the Company's equity interest in
the earnings of Eastern Funding LLC and $47,000 of profit from disposition of a
property tied to a particular lending arrangement.
NON-INTEREST EXPENSE
Expense related to the RRP was $768,000 in the 2000 period compared to $1.3
million in the 1999 period. The 2000 period also included $1.5 million of
expense attributable to Lighthouse. Excluding RRP and Lighthouse expenses, total
non-interest expense increased $422,000, or 8.7%, from $4.9 million in the 1999
period to $5.3 million in the 2000 period. Most of the increase resulted from
higher compensation and employee benefits (up $92,000, or 3.0%), higher
marketing expenses (up $135,000, or 60.0%) and higher professional fees (up
$147,000, or 97%). Marketing efforts were expanded so as to attract new deposit
customers from other financial institutions going through divestitures. The
higher professional fees resulted from special corporate initiatives and a
review of security controls pertaining to the electronic banking capabilities of
Brookline Savings Bank.
INCOME TAXES
The effective rate of income taxes was 35.2% in the 2000 period compared to
35.7% in the 1999 period. State taxes remained at low levels for the same
reasons stated in the analysis of second quarter operating results.
PROJECTED IMPACT OF NEW INTERNET BANK SUBSIDIARY - LIGHTHOUSE
19
As previously stated herein, Lighthouse commenced doing business with the
public in the last week of June 2000. Lighthouse will likely incur losses in its
first two years. After-tax operating losses of Lighthouse, including foregone
income on the Company's $25 million investment in Lighthouse, could be in the
range of $2.0 million to $2.5 million in the second half of 2000 and $2.0
million to $2.3 million in 2001. These estimates of future operating results
constitute forward-looking statements (within the meaning of the Private
Securities Litigation Reform Act of 1995) and are subject to risks and
uncertainties that could cause actual results to differ materially. Factors that
might cause such a difference include, but are not limited to, general economic
conditions, changes in interest rates, regulatory considerations, competition,
technological developments, recruitment of qualified personnel and market
acceptance of Lighthouse's pricing, products and services.
ASSET/LIABILITY MANAGEMENT
The Company's Asset/Liability Committee is responsible for managing interest
rate risk and reviewing with the Board of Directors on a quarterly basis its
activities and strategies, the effect of those strategies on the Company's
operating results, the Company's interest rate risk position and the effect
changes in interest rates would have on the Company's net interest income.
Generally, it is the Company's policy to reasonably match the rate
sensitivity of its assets and liabilities. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. Also taken into
consideration are interest rate swap agreements entered into by the Company. At
June 30, 2000, interest earning assets maturing or repricing within one year
amounted to $335.7 million and interest-bearing liabilities maturing or
repricing within one year amounted to $455.4 million resulting in a cumulative
one year negative gap position of $119.7 million, or 13.0% of total assets. At
December 31, 1999, the Company had a cumulative one-year negative gap position
of $81.5 million, or 9.0% of total assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and interest
payments on loans and debt seucrities and borrowings from the FHLB. While
maturities and scheduled amortization of loans and investments are predictable
sources of funds, deposit flows and mortgage loan prepayments are greatly
influenced by interest rate trends, economic conditions and competition.
During the past few years, the combination of generally low interest rates on
deposit products and the attraction of alternative investments such as mutual
funds and annuities has resulted in little growth or a net decline in deposits
in certain time periods. 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.
From time to time, the Company utilizes advances from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. During the six months ended June 30, 2000, the Company repaid
advances of $11.4 million and obtained new advances of $14.9 million. Total
advances outstanding at June 30, 2000 amounted to $112.3 million.
The Company's most liquid assets are cash and due from banks, short-term
investments, debt securities and money market loan participations that generally
mature within 90 days. At June 30, 2000, such assets amounted to $49.5 million,
or 5.4% of total assets.
At June 30, 2000, the Company and its two bank subsidiaries exceeded all
regulatory capital requirements. At that date, Brookline's leverage capital was
$194.1 million, or 22.6% of its adjusted assets, and Lighthouse's leverage
capital was $23.9 million, or 99.2% of its adjusted assets. The minimum required
leverage capital ratio is 3.00% to 5.00% depending on a bank's supervisory
rating.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
For a discussion of the Company's management of market risk exposure, see
"Asset/Liability Management" in Item 2 of Part 1 of this report and pages 12
through 14 of the Company's Annual Report incorporated by reference in Part II
item 7A of Form 10-K for the fiscal year ending December 31, 1999.
For quantitative information about market risk, see pages 12 through 14 of
the Company's 1999 Annual Report.
There have been no material changes in the quantitative disclosures about
market risk as of June 30, 2000 from those presented in the Company's 1999
Annual Report.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any litigation, nor is
the Company aware of any pending litigation, other than legal proceedings
incident to the business of the Company. Management believes the results of any
current pending litigation would be immaterial to the consolidated financial
condition or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
All required exhibits are included in Part I under Financial Statements
(Unaudited) and Management's Discussion and Analysis of Operations, and are
incorporated by reference, herein.
There were no reports filed on Form 8-K.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
BROOKLINE BANCORP, INC.
DATE: AUGUST 7, 2000 BY: /S/ RICHARD P. CHAPMAN JR.
--------------------------------
RICHARD P. CHAPMAN, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATE: AUGUST 7, 2000 BY: /S/ PAUL R. BECHET
---------------------------------
PAUL R. BECHET
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
22