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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 - 27,476,072 shares outstanding as of
November 10, 2000.
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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets
as of September 30, 2000 and December 31, 1999 1
Consolidated Statements of Income for the three months and
nine months ended September 30, 2000 and 1999 2
Consolidated Statements of Comprehensive Income for the
three months and nine months ended September 30, 2000 and 1999 3
Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 6
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risks 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
Signature Page 26
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- --------------
(Unaudited)
ASSETS
Cash and due from banks................................................ $ 11,731 $ 8,203
Short-term investments................................................. 11,680 9,435
Securities available for sale.......................................... 139,606 128,275
Securities held to maturity (market value of $60,913
and $102,451, respectively).......................................... 61,118 103,434
Restricted equity securities........................................... 6,895 6,279
Loans, excluding money market loan participations...................... 688,181 635,556
Money market loan participations....................................... 46,000 15,400
Allowance for loan losses.............................................. (14,261) (13,874)
------- --------
Net loans......................................................... 719,920 637,082
------- --------
Other investment....................................................... 3,263 3,022
Accrued interest receivable............................................ 5,943 5,811
Bank premises and equipment, net....................................... 3,435 1,535
Other real estate owned, net........................................... 530 707
Deferred tax asset..................................................... 4,712 3,226
Other assets........................................................... 939 325
------- --------
Total assets...................................................... $ 969,772 $ 907,334
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................................................... $ 546,670 $ 512,136
Borrowed funds......................................................... 130,400 108,800
Mortgagors' escrow accounts............................................ 4,187 3,624
Income taxes payable................................................... 1,236 898
Accrued expenses and other liabilities................................. 7,872 7,076
------- --------
Total liabilities................................................. 690,365 632,534
------- --------
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........................................... 140,329 140,355
Retained earnings.................................................... 161,647 150,098
Accumulated other comprehensive income............................... 6,354 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............... (1,184) (2,316)
Unallocated common stock held by ESOP - 464,748 shares
and 407,218 shares, respectively................................... (5,537) (5,058)
------- --------
Total stockholders' equity........................................ 279,407 274,800
------- --------
Total liabilities and stockholders' equity........................ $ 969,772 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ --------------------------
2000 1999 2000 1999
--------- --------- --------- ----------
(UNAUDITED)
Interest income:
Loans, excluding money market loan participations........ $ 14,231 $ 12,556 $ 41,114 $ 35,828
Money market loan participations......................... 694 385 1,322 1,352
Debt securities.......................................... 2,692 3,136 8,279 9,747
Marketable equity securities............................. 210 226 694 639
Restricted equity securities............................. 126 95 348 268
Short-term investments................................... 198 140 657 495
------- ------- ------ -------
Total interest income................................. 18,151 16,538 52,414 48,329
------- ------- ------ -------
Interest expense:
Deposits................................................. 5,825 5,195 16,695 15,467
Borrowed funds........................................... 1,908 1,682 5,241 4,815
------- ------- ------ -------
Total interest expense ............................... 7,733 6,877 21,936 20,282
------- ------- ------ -------
Net interest income........................................ 10,418 9,661 30,478 28,047
Provision for loan losses.................................. 69 - 369 300
------- ------- ------ -------
Net interest income after provision for loan losses... 10,349 9,661 30,109 27,747
------- ------- ------ -------
Non-interest income:
Fees and charges......................................... 248 222 671 661
Gains on sales of securities, net........................ 2,316 1,989 6,459 5,587
Other real estate owned income, net...................... 18 651 83 759
Other income............................................. 100 3 331 12
------- ------- ------ -------
Total non-interest income............................. 2,682 2,865 7,544 7,019
------- ------- ------ -------
Non-interest expense:
Compensation and employee benefits....................... 2,056 1,517 5,507 4,589
Recognition and retention plan........................... 365 1,637 1,132 2,911
Occupancy................................................ 280 178 687 527
Equipment and data processing............................ 568 311 1,224 876
Advertising and marketing................................ 948 150 1,584 375
Internet bank start-up .................................. - 272 746 272
Other ................................................... 493 311 1,347 973
------- ------- ------ -------
Total non-interest expense............................ 4,710 4,376 12,227 10,523
------- ------- ------ -------
Income before income taxes................................. 8,321 8,150 25,426 24,243
Provision for income taxes................................. 2,955 2,872 8,974 8,618
------- ------- ------ -------
Net income............................................ $ 5,366 $ 5,278 $ 16,452 $ 15,625
======= ======= ====== ======
...................................................
Weighted average common shares
outstanding during the period 26,733,313 27,871,007 26,888,976 28,159,850
========== ========== ========== ==========
Basic and diluted earnings per common share $ 0.20 $ 0.19 $ 0.61 $ 0.55
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
------ ------ ------ ------
(UNAUDITED)
Net income................................................. $ 5,366 $ 5,278 $ 16,452 $ 15,625
----- ----- ------ ------
Other comprehensive income (loss), net of taxes:
Unrealized holding gains (losses)........................ 4,870 (4,433) 4,281 (2,955)
Income tax expense (benefit)............................. 1,787 (1,615) 1,571 (1,187)
------- -------- ------ --------
Net unrealized holding gains (losses).............. 3,083 (2,818) 2,710 (1,768)
------- -------- ------ --------
Less reclassification adjustment for gains
included in net income:
Realized gains........................................ 2,316 1,989 6,459 5,587
Income tax expense.................................... 845 767 2,344 2,228
------- ------- ------ -------
Net reclassification adjustment.................... 1,471 1,222 4,115 3,359
------- ------- ------ -------
Total other comprehensive income (loss)............ (1,612) (4,040) (1,405) (5,127)
-------- ------- ------- --------
Comprehensive income....................................... $ 6,978 $ 1,238 $ 15,047 $ 10,498
====== ====== ====== ======
See accompanying notes to the unaudited consolidated financial statements.
3
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 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 ........................ -- -- 15,625 -- -- -- -- 15,625
Unrealized loss on securities
available for sale, net of
reclassification adjustment .... -- -- -- (5,127) -- -- -- (5,127)
Common stock dividends
of $.15 per share .............. -- -- (4,292) -- -- -- -- (4,292)
Treasury stock purchases
(994,700 shares) ............... -- -- -- -- (11,184) -- -- (11,184)
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 ............. -- -- -- -- -- 2,911 -- 2,911
Common stock acquired by ESOP
(20,000 shares) ................ -- -- -- -- -- -- (200) (200)
Common stock held by ESOP
committed to be released
(23,702 shares) ................ -- (13) -- -- -- -- 291 278
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1999 ..... $ 296 $ 140,381 $ 146,615 $ 9,289 $ (12,500) $ (2,998) $ (4,850) $ 276,233
========= ========= ========= ========= ========= ========= ========= =========
(Continued)
4
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 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 ..................... -- -- 16,452 -- -- -- -- 16,452
Unrealized loss on securities
available for sale, net of
reclassification adjustment.. -- -- -- (1,405) -- -- -- (1,405)
Common stock dividends of
$0.12 per share ............. -- -- (4,903) -- -- -- -- (4,903)
Treasury stock purchases
(648,728 shares) ............ -- -- -- -- (6,164) -- -- (6,164)
Compensation under recognition
and retention plan .......... -- -- -- -- -- 1,132 -- 1,132
Common stock acquired by ESOP
(84,386 shares) ............. -- -- -- -- -- -- (802) (802)
Common stock held by ESOP
committed to be released
(26,856 shares) ............. -- (26) -- -- -- -- 323 297
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 2000.. $ 296 $ 140,329 $ 161,647 $ 6,354 $ (22,498) $ (1,184) $ (5,537) $ 279,407
========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to the unaudited consolidated financial statements.
5
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
-------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net income........................................................... $ 16,452 $ 15,625
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses........................................ 369 300
Compensation under recognition and retention plan................ 1,132 2,911
Release of ESOP shares........................................... 297 278
Depreciation and amortization.................................... 559 406
Amortization, net of accretion, of securities premiums
and discounts.................................................. 737 1,248
Accretion of deferred loan origination fees
and unearned discounts......................................... (361) (405)
Net gains from sales of securities available for sale............ (6,459) (5,587)
Net gains from sales of other real estate owned.................. (28) (615)
Equity interest in earnings of other investment.................. (241) -
Deferred income taxes............................................ (713) (1,531)
(Increase) decrease in:
Accrued interest receivable.................................... (132) (118)
Other assets................................................... (614) (81)
Increase (decrease) in:
Income taxes payable........................................... 338 639
Accrued expenses and other liabilities......................... 796 301
-------- --------
Net cash provided by operating activities.................... 12,132 13,371
-------- --------
Cash flows from investing activities:
Proceeds from sales of securities available for sale................. 10,121 5,817
Proceeds from redemptions and maturities of securities
available for sale................................................. 43,216 37,040
Proceeds from redemptions and maturities of securities
held to maturity................................................... 41,625 36,299
Purchase of securities available for sale............................ (60,433) (42,095)
Purchase of securities held to maturity.............................. - (29,070)
Purchase of Federal Home Loan Bank of Boston stock................... (616) (984)
Purchase of other restricted equity securities ...................... - (31)
Net increase in loans................................................ (64,224) (77,743)
Funding of other investment ......................................... - (3,001)
Proceeds from sales of participation in loans........................ 11,978 4,750
Purchase of bank premises and equipment.............................. (2,443) (520)
Capital expenditures on other real estate owned...................... - (30)
Proceeds from sales of other real estate owned....................... 189 1,794
-------- --------
Net cash used for investing activities....................... (20,587) (67,774)
-------- -------
(Continued)
6
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
-------- ---------
(UNAUDITED)
Cash flows from financing activities:
Increase (decrease) in demand deposits and NOW, savings and
money market savings accounts...................................... $ 21,755 $ 24,326
Increase (decrease) in certificates of deposit....................... 12,779 (9,129)
Proceeds from Federal Home Loan Bank of Boston advances.............. 33,900 32,500
Repayment of Federal Home Loan Bank of Boston advances............... (12,300) (15,550)
Increase in mortgagors' escrow accounts.............................. 563 552
Purchase of common stock for ESOP.................................... (802) (200)
Payment of dividends on common stock................................. (4,903) (4,292)
Purchase of treasury stock........................................... (6,164) (11,184)
------- --------
Net cash provided by financing activities...................... 44,828 17,023
------- --------
Net increase (decrease) in cash and cash equivalents................... 36,373 (37,380)
Cash and cash equivalents at beginning of period....................... 33,038 73,617
------- --------
Cash and cash equivalents at end of period............................. $ 69,411 $ 36,237
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds............................ $ 21,835 $ 20,231
Income taxes....................................................... 9,334 9,501
See accompanying notes to the unaudited consolidated financial statements.
7
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 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 nine months ended
September 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 ("Brookline") for the purpose of
acquiring all of the capital stock of Brookline upon completion of
Brookline'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 Brookline (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
Brookline at $10.00 per share. Net proceeds from the Offering amounted
to $134,790.
(3) 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 September 30, 2000 is
as follows:
OPERATING EXPENSES START-UP EXPENSES
------------------------------ ---------------------------
THREE MONTHS FIVE MONTHS FOUR MONTHS SECOND
ENDED ENDED ENDED HALF
SEPT 30, 2000 SEPT 30, 2000 APRIL 30, 2000 OF 1999
--------------- ------------- ----------------- --------
Compensation and benefits $ 460 $ 747 $ 409 $ 290
Occupancy 71 117 105 104
Equipment and data processing 239 301 45 15
Advertising and marketing 772 1,048 97 44
Other 171 207 90 222
----- ----- --- ---
$ 1,713 $ 2,420 $ 746 $ 675
===== ===== === ===
8
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(4) BUSINESS SEGMENTS (DOLLARS IN THOUSANDS)
The Company's wholly-owned bank subsidiaries, Brookline and Lighthouse,
collectively "the Banks", have been identified as reportable operating
segments in accordance with the provisions of SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information". The Brookline
operating segment includes its wholly-owned subsidiaries. The "All Other"
segment presented below includes the Company and its wholly-owned
securities corporation.
The primary activities of the Banks include acceptance of deposits from
the general public, origination of mortgage loans on residential and
commercial real estate, commercial and consumer loans, and investment in
debt securities, mortgage-backed securities and other financial
instruments. Brookline conducts its business primarily through its branch
network while Lighthouse conducts its business primarily through the
internet. Each of the Banks has its own chief executive officer and Board
of Directors.
The Company and the Banks follow generally accepted accounting principles
as described in the summary of significant accounting policies. Income
taxes are provided in accordance with tax allocation agreements between
the Company and the Banks. Intercompany expenditures are allocated based
on actual or estimated costs. Consolidation adjustments reflect
elimination of intersegment revenue and expenses and balance sheet
accounts.
The following table sets forth certain information about and the
reconciliation of reported net income for each of the reportable
segments. Lighthouse commenced doing business with the public in the last
week of June 2000. Start-up expenses incurred prior to that time are
presented separately in the following table.
ALL CONSOLIDATION
BROOKLINE LIGHTHOUSE OTHER ADJUSTMENTS CONSOLIDATED
--------- ---------- ----- ------------- ------------
AT OR FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2000
--------------------------
Interest income $ 17,116 $ 499 $ 2,031 $ (1,495) $ 18,151
Interest expense 7,833 95 - (195) 7,733
Provision for loan losses - 69 - - 69
Securities gains 2,311 5 - - 2,316
Other non-interest income 293 5 97 (29) 366
Non-interest expense 2,941 1,713 56 - 4,710
Income tax expense (benefit) 3,106 (479) 328 - 2,955
Net income (loss) 5,840 (889) 1,744 (1,329) 5,366
Total loans, excluding money
market loan participations $ 667,245 $ 20,936 $ - $ - $ 688,181
Total deposits 535,597 16,865 - (5,792) 546,670
Total assets 890,844 40,234 285,956 (247,262) 969,772
9
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
ALL CONSOLIDATION
BROOKLINE LIGHTHOUSE OTHER ADJUSTMENTS CONSOLIDATED
--------- ---------- ----- ------------- ------------
AT OR FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1999
--------------------------
Interest income $ 15,788 $ - $ 9,855 $ (9,105) $ 16,538
Interest expense 6,982 - - (105) 6,877
Provision for loan losses - - - - -
Securities gains 1,989 - - - 1,989
Other non-interest income 897 - - (21) 876
Start-up expenses - 272 - - 272
Other non-interest expense 4,033 - 71 - 4,104
Income tax expense (benefit) 2,702 (109) 279 - 2,872
Net income (loss) 4,957 (163) 9,505 (9,021) 5,278
Total loans, excluding money
market loan participations $ 622,281 $ - $ - $ - $ 622,281
Total deposits 504,567 - - - 504,567
Total assets 852,286 - 281,538 (225,253) 908,571
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2000
-------------------------
Interest income $ 49,835 $ 744 $ 25,565 $ (23,730) $ 52,414
Interest expense 22,396 95 - (555) 21,936
Provision for loan losses 300 69 - - 369
Securities gains 6,454 5 - - 6,459
Other non-interest income 909 5 254 (83) 1,085
Start-up expenses - 746 - - 746
Other non-interest expense 8,834 2,420 227 - 11,481
Income tax expense (benefit) 9,024 (953) 903 - 8,974
Net income (loss) 16,644 (1,623) 24,689 (23,258) 16,452
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999
-------------------------
Interest income $ 46,062 $ - $ 17,582 $(15,315) $ 48,329
Interest expense 20,597 - - (315) 20,282
Provision for loan losses 300 - - - 300
Securities gains 5,587 - - - 5,587
Other non-interest income 1,492 - - (60) 1,432
Start-up expenses - 272 - - 272
Other non-interest expense 10,081 - 170 - 10,251
Income tax expense (benefit) 7,844 (109) 883 - 8,618
Net income (loss) 14,319 (163) 16,529 (15,060) 15,625
10
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(5) 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 nine months ended September 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 September 30
------------------
Basic $ 5,366 $ 5,278 26,733,313 27,871,007 $ 0.20 $ 0.19
Effect of dilutive
stock options - - 32,852 5,548 - -
----- ----- ---------- ---------- ---- ----
Dilutive $ 5,366 $ 5,278 26,766,165 27,876,555 $ 0.20 $ 0.19
===== ===== ========== ========== ==== ====
Nine months
Ended Septmeber 30
------------------
Basic $ 16,452 $ 15,625 26,888,976 28,159,850 $ 0.61 $ 0.55
Effect of dilutive
stock options - - - 7,752 - -
------ ------ ---------- ---------- ---- ----
Dilutive $ 16,452 $ 15,625 26,888,976 28,167,602 $ 0.61 $ 0.55
====== ====== ========== ========== ==== ====
(6) ACCUMULATED OTHER COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
Accumulated other comprehensive income is comprised entirely of
unrealized gains on securities available for sale, net of income taxes.
At September 30, 2000 and December 31, 1999, such taxes amounted to
$3,701 and $4,474, respectively.
(7) COMMITMENTS AND SWAP AGREEMENT (DOLLARS IN THOUSANDS)
At September 30, 2000, the Company had outstanding commitments to
originate loans of $92,688, $74,714 of which were commercial real estate
and multi-family mortgage loans. Unused lines of credit available to
customers were $16,232, $9,986 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
nine months ended September 30, 2000 and 1999 was $(14) and $31,
respectively.
11
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(8) DIVIDEND DECLARATION
On October 19, 2000, the Board of Directors of the Company approved and
declared a regular quarterly cash dividend of $0.06 per share of common
stock to shareholders of record as of October 31, 2000 and payable on
November 15, 2000.
(9) 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
September 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 nine months 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.
12
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 (actual expense) 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
=======
(10) EMPLOYEE STOCK OWNERSHIP PLAN (DOLLARS IN THOUSANDS)
On March 24, 1998, the Board of Directors of Brookline approved an
employee stock ownership plan (the "ESOP"). All Brookline employees
meeting age and service requirements are eligible to participate in the
ESOP. The ESOP purchased in the open market all of the 546,986 shares it
was authorized to purchase at an aggregate cost of $6,598. The purchase
of the shares was financed by a loan from the Company that 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 Brookline and dividends on
unallocated shares of Company stock held by the ESOP, subject to IRS
limitations.
For the nine months ended September 30, 2000 and 1999, $277 and $270,
respectively, were charged to compensation and employee benefits expense
based on the commitment to release 26,856 and 23,702 shares, respectively,
to eligible employees.
13
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.
At September 30, 2000, Brookline Bancorp, MHC owned 57% of the Company's
outstanding common stock.
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, technological developments, new accounting
pronouncements and changing regulatory requirements.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
Total assets increased $62.4 million, or 6.9%, from $907.3 million at
December 31, 1999 to $969.8 million at September 30, 2000. Of that increase,
$46.8 million, or 5.2%, took place since June 30, 2000. Part of the increase is
attributable to Lighthouse, the Company's internet-only bank subsidiary that
commenced doing business with the public in the last week of June 2000.
Excluding money market loan participations, the loan portfolio increased
$52.6 million, or 8.3%, since December 31, 1999 and $19.4 million, or 2.9%,
since June 30, 2000. About half of the growth since the beginning of the year
and substantially all of the growth since June 30, 2000 took place in the
residential mortgage loan sector. Lighthouse loans, comprised primarily of
residential mortgage loans, amounted to $20.9 million at September 30, 2000.
Money market loan participations amounted to $46.0 million at September 30,
2000, $24.8 million at June 30, 2000 and $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.
Securities available for sale and securities held to maturity amounted to
$200.7 million at September 30, 2000 compared to $201.5 million at June 30, 2000
and $231.7 million at December 31, 1999. Proceeds resulting from the decline in
the first half of 2000 were used to fund part of the loan growth and the
repurchase of Company stock during that time.
Total deposits were $546.7 million at September 30, 2000 compared to $525.1
million at June 30, 2000 (a $21.5 million, or 4.1% increase) and $512.1 million
at December 31, 1999 (a $34.5 million, or 6.7% increase). During the three
months ended September 30, 2000, deposits at Lighthouse grew $16.7 million.
Approximately 36% of Lighthouse's growth was in interest-bearing checking
accounts, 35% in money market savings accounts and 29% in certificates of
deposit. Excluding Lighthouse, deposits at Brookline increased $17.7 million
since December 31, 1999 ($4.8 million since June 30, 2000). Of Brookline's
growth since the beginning of the year, approximately 30% was in checking
accounts, 26% in money market savings accounts and 44% in certificates of
deposit. Such growth was attributable in part to expanded marketing efforts and
branch divestitures by other financial institutions.
14
Total borrowed funds, all of which were advances from the Federal Home Loan
Bank of Boston ("FHLB"), amounted to $130.4 million at September 30, 2000
compared to $112.3 million at June 30, 2000 and $108.8 million at December 31,
1999. The funds were borrowed in connection with the Company's management of the
interest rate sensitivity of its assets and liabilities.
Total stockholders' equity was $279.4 million at September 30, 2000 compared
to $273.6 million at June 30, 2000 and $274.8 million at December 31, 1999. The
increase since the beginning of the year was attributable to net income
exceeding outflows for dividend payments to stockholders and share repurchases.
The Company purchased 733,114 shares of its common stock in the first half of
2000 at an aggregate cost of $7.0 million, or $9.50 per share. No shares were
repurchased in the third quarter of 2000. As of September 30, 2000, the Company
can purchase an additional 312,881 shares under a repurchase plan approved by
the Company's regulators on March 10, 2000. Since becoming a public company,
2,687,414 shares were repurchased through September 30, 2000 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 $10.1 million ($6.4 million
on an after-tax basis) at September 30, 2000, $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 changes are after realization of
gains from sales of marketable equity securities of $2.3 million ($1.5 million
on an after-tax basis) for the three months ended September 30, 2000 and $6.5
million ($4.1 million on an after-tax basis) for the nine months ended September
30, 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:
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ---------
(DOLLARS IN THOUSANDS)
Non-accrual loans $ 142 $ -
Other real estate owned, net of allowance
for losses of $86 and $86, respectively 530 707
---------- ---------
Total non-performing assets $ 672 $ 707
========== =========
Restructured loans $ - $ -
========== =========
Allowance for loan losses $ 14,261 $ 13,874
========== =========
Allowance for loan losses as a percent
of total loans 1.94% 2.13%
Allowance for loan losses as a percent
of total loans, excluding money market
participation loans 2.07% 2.18%
Non-accrual loans as a percent of total loans 0.02% - %
Non-performing assets as a percent of
total assets 0.07% 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 September 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 nine months ended September 30, 2000, recoveries of loans
previously charged off amounted to $18,000 and there were no loan charge-offs.
Despite net loan recoveries and a small amount of non-performing loans at
September 30, 2000, the Company increased its allowance for loan losses by
providing $369,000 as a
15
charge to earnings in the first nine months of 2000. Management increased
the allowance in light of the $52.6 million increase in net loans outstanding
in the first nine months of 2000 (exclusive of money market loan
participations), approximately half of which occurred in the higher risk
categories of multi-family and commercial real estate mortgage loans and half
in the residential mortgage lending category. Of the total nine month
provision, $69,000 was charged to Lighthouse in recognition of its lending
activity.
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. On September 7, 2000, a proposed policy
statement on allowance for loan loss methodologies and documentation for banks
was issued for comment by the four federal banking agencies. The comment period
ended November 6, 2000. The Company has not yet evaluated 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 SEPTEMBER 30, 2000
AND 1999
GENERAL
Operating results are primarily dependent on the Company's net interest
income, which is the difference between interest earned on the Company's loan
and investment portfolios and 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 September 30, 2000 was $5.4 million
($0.20 per share) compared to $5.3 million ($0.19 per share) for the three
months ended September 30, 1999. The per share improvement resulted primarily
from less shares outstanding due to stock repurchases. Basic and diluted
earnings per share are the same in both the three month and nine month periods
ended September 30, 2000 and 1999. The 2000 and 1999 quarterly periods included
gains from sales of marketable equity securities of $2.3 million ($1.5 million
on an after-tax basis, or $0.05 per share) and $2.0 million ($1.2 million on an
after-tax basis, or $0.04 per share), respectively, and expense related to the
recognition and retention plan ("RRP") approved by stockholders of $365,000
($212,000 on an after-tax basis, or $0.01 per share) and $1.6 million ($952,000
on an after-tax basis, or $0.03 per share), respectively.
The 2000 and 1999 quarters also included losses of $1.6 million ($889,000 on
an after-tax basis, or $0.03 per share) and $272,000 ($158,000 on an after-tax
basis, or $0.01 per share), respectively, related to Lighthouse, New England's
first-chartered internet-only bank. Lighthouse commenced doing business with the
public near the end of the second quarter of 2000. The 1999 Lighthouse loss
represented start-up expenses. See notes 3 and 4 to the unaudited consolidated
financial statements on pages 8 through 10 herein for more financial information
about Lighthouse.
16
The 1999 quarter also included interest income of $224,000 ($145,000 on an
after-tax basis) collected from a borrower that related to prior periods and a
$615,000 gain ($399,000 on an after-tax basis) from the sale of a foreclosed
property. Excluding securities gains, the expense of the RRP, Lighthouse's net
losses and the 1999 non-recurring income items, and adding back estimated
after-tax foregone income of $267,000 on the Company's $25 million capital
investment in Lighthouse made at the beginning of May 2000, quarterly net
operating income was $5.3 million ($0.20 per share) in 2000 compared to $4.6
million ($0.17 per share) in 1999, an improvement of 14% (18% on a per share
basis).
Improved quarterly operating results were derived primarily from an increase
in interest rate spread from 2.68% in the 1999 quarter to 3.05% in the 2000
quarter and a $24.3 million, or 2.7%, increase in average interest-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
interest-earning assets from 67% in the 1999 quarter to 73% in the 2000 quarter
and an increase in the yield on assets greater than the increase in the rate
paid on liabilities. Excluding Lighthouse and RRP expenses, the Company's
operating efficiency ratio was 25.3% for the 2000 quarter compared to 23.4% in
the 1999 quarter.
AVERAGE BALANCE SHEETS AND INTEREST RATES
The following table sets forth certain information relating to the Company
for the three months ended September 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.
17
THREE MONTHS ENDED SEPTEMBER 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 ................ $ 12,057 $ 198 6.48% $ 11,443 $ 140 4.89%
Debt securities (2) ................... 160,606 2,512 6.26 217,091 3,148 5.80
Equity securities (2) ................. 30,652 412 5.38 40,187 403 4.01
Mortgage loans (3)(4) ................. 637,603 13,413 8.41 585,474 11,879 8.12
Money market loan participations ...... 40,426 694 6.81 28,640 385 5.38
Other commercial loans (3) ............ 24,564 520 8.47 21,765 394 7.24
Consumer loans (3) .................... 2,023 51 10.08 2,043 47 9.20
Lighthouse debt securities (2) ........ 9,927 180 7.25 -- -- --
Lighthouse mortgage loans (3) ......... 13,090 247 7.55 -- -- --
-------- ------- --------- --------
Total interest-earning assets ...... 930,948 18,227 7.83 906,643 16,396 7.23
------- ----- -------- -----
Allowance for loan losses ............... (14,253) (13,538)
Non-interest earning assets ............. 29,691 16,948
-------- ---------
Total assets ....................... $ 946,386 $ 910,053
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits - Brookline:
NOW accounts ....................... $ 48,244 149 1.23% $ 44,080 136 1.23%
Savings accounts (5) ............... 12,149 67 2.19 13,208 74 2.24
Money market savings accounts ...... 204,349 2,016 3.91 197,582 1,942 3.93
Certificate of deposit accounts .... 246,925 3,497 5.62 238,484 3,043 5.10
-------- ------- --------- --------
Total deposits - Brookline ....... 511,667 5,729 4.44 493,354 5,195 4.21
Deposits - Lighthouse:
Transaction accounts .............. 4,914 59 4.76 -- -- --
Certificate of deposit accounts .... 2,150 37 6.83 -- -- --
-------- ------- --------- --------
Total deposits - Lighthouse ...... 7,064 96 5.39 -- -- --
Borrowed funds ........................ 123,325 1,908 6.14 110,615 1,682 6.08
-------- ------- --------- --------
Total interest bearing liabilities 642,056 7,733 4.78 603,969 6,877 4.55
------- ------ -------- --------
Non-interest-bearing demand
checking accounts .................... 15,047 12,836
Other liabilities ....................... 11,701 14,214
-------- ---------
Total liabilities ................ 668,804 631,019
Stockholders' equity .................... 277,582 279,034
-------- ---------
Total liabilities and
stockholders' equity ......... $ 946,386 $ 910,053
========= =========
Net interest income (tax equivalent
basis)/interest rate spread (6) ....... 10,494 3.05% 9,519 2.68%
===== ====
Less adjustment of tax exempt income .... 76 82
--------- ---------
Net interest income (4) ................. $ 10,418 $ 9,437
========= =========
Net interest margin (7) ................. 4.51% 4.20%
===== ====
- ---------
(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) Excluded from interest income for the 1999 period is $224 collected from a
borrower that relates to prior periods.
(5) Savings accounts include interest-bearing mortgagors' escrow accounts.
(6) Net interest 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
$14.2 million in the 2000 quarter compared to $12.5 million in the 1999 quarter,
an increase of $1.7 million, or 13.3%. The additional income resulted from an
increase in average loans outstanding of $68.0 million, or 11.2%, between the
two quarterly periods. The average rate earned on loans increased from 8.24% in
the 1999 quarter to 8.40% 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.
18
The average balance invested in money market loan participations during the
three months ended September 30, 2000 and 1999 were $40.4 million and $28.6
million, respectively, and the yields on those balances were 6.81% and 5.38%,
respectively. Interest income on debt securities declined 14.5% from $3.1
million in the 1999 quarter to $2.7 million in the 2000 quarter as a result of a
$46.6 million, or 21.4%, reduction in the average balances invested in debt
securities between the two periods. Yields earned on debt securities improved
from 5.80% in the 1999 quarter to 6.31% in the 2000 quarter. Proceeds from the
decline in the average balance of debt securities were used to fund part of the
loan growth. The improved investment yields resulted from higher market rates
and 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 $5.8 million for the three months ended
September 30, 2000, a 12.1% increase from the $5.2 million expended for the
three months ended September 30, 1999. Most of the increase was due to a 5.1%
increase in the average balance of interest-bearing deposits from $493.4 million
in the 1999 quarter to $518.7 million in the 2000 quarter. The average rate paid
on those deposits rose from 4.21% in the 1999 quarter to 4.49% in the 2000
quarter due in part to the actions of the Federal Reserve previously mentioned
herein and to higher rates offered to customers depositing funds at Lighthouse.
Further initiatives by the Federal Reserve similar to those taken since June
1999 inevitably will cause interest rates paid on deposits (especially
certificates of deposit) 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 FHLB increased from $110.6 million in the 1999
quarter to $123.3 million in the 2000 quarter. The average rate paid on those
balances were 6.08% and 6.14%, respectively. Borrowings from the FHLB are
usually obtained in connection with the Company's management of interest rate
risk.
NON-INTEREST INCOME
Gains on sales of marketable equity securities during the three months ended
September 30, 2000 and 1999 were $2.3 million and $2.0 million, respectively.
Marketable equity securities are held by the Company primarily for capital
appreciation and not for trading purposes. For each of the past six 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 losses relating to Lighthouse and the expense of the RRP.
Continuation of securities gains in the range realized during the past six
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.
In the third quarter of 1999, a property in foreclosure was sold at a gain of
$615,000, including reversal of a $150,000 valuation allowance previously
established for the property.
The increase in other non-interest income from $3,000 in the 1999 quarter to
$100,000 in the 2000 quarter resulted from $97,000 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.
NON-INTEREST EXPENSE
Expense related to the RRP approved by stockholders on April 15, 1999 (see
note 9 to the unaudited consolidated financial statements on page 11 herein)
amounted to $365,000 in the 2000 quarter and $1.6 million in the 1999 quarter.
RRP expense is allocated to the periods over which the underlying shares vest.
Expenses related to Lighthouse amounted to $1.7 million in the 2000 quarter and
$272,000 in the 1999 quarter (see notes 3 and 4 to the unaudited consolidated
financial statements on pages 8 through 10 herein).
19
Excluding RRP and Lighthouse expenses, total non-interest expense increased
$165,000, or 6.7%, from $2.5 million in the 1999 quarter to $2.6 million in the
2000 quarter. Part of the increase related to personnel and occupancy costs
incurred in connection with a new branch that was opened in Newton in October
2000. The remainder of the expense increase resulted from generally higher
operating costs.
INCOME TAXES
The effective rate of income taxes was 35.5% in the 2000 quarter and 35.2% 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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
1999
GENERAL
Net income for the nine months ended September 30, 2000 was $16.5 million
($0.61 per share) compared to $15.6 million ($0.55 per share) for the nine
months ended September 30, 1999, an improvement of $827,000, or 5.3% (10.9% on a
per share basis). The 2000 and 1999 periods included gains from sales of
marketable equity securities of $6.5 million ($4.1 million on an after-tax
basis, or $0.15 per share) and $5.6 million ($3.4 million on an after-tax basis,
or $0.12 per share), respectively, and RRP expense of $1.1 million ($659,000 on
an after-tax basis, or $0.03 per share) and $2.9 million ($1.7 million on an
after-tax basis, or $0.06 per share), respectively.
The 2000 and 1999 periods also included losses of $2.6 million ($1.6 million
on an after-tax basis, or $0.06 per share) and $272,000 ($158,000 on an
after-tax basis, or $0.01 per share), respectively, related to Lighthouse. The
1999 quarter also included interest income of $224,000 ($145,000 on an after-tax
basis) collected from a borrower that related to prior periods and a $615,000
gain ($399,000 on an after-tax basis) from the sale of a foreclosed property.
Excluding securities gains, the expense of the RRP, Lighthouse's net losses, and
adding back estimated after-tax foregone income of $435,000 on the Company's $25
million capital investment in Lighthouse made at the beginning of May 2000, net
operating income for the 2000 period was $15.1 million ($0.56 per share)
compared to $13.6 million ($0.48 per share) in the 1999 period, an increase of
10.9% (16.7% on a per share basis).
Improved operating results were derived primarily from an increase in
interest rate spread from 2.65% in the 1999 period to 3.02% in the 2000 period
and a $19.1 million, or 2.1%, increase in average interest-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
interest-earning assets from 65% to 72% and an increase in the yield on assets
greater than the increase in the rate paid on liabilities. Excluding Lighthouse
and RRP expenses, the Company's operating efficiency ratio was 25.7% for the
2000 period compared to 24.9% for the 1999 period.
AVERAGE BALANCE SHEETS AND INTEREST RATES
The following table sets forth certain information relating to the Company
for the nine months ended September 30, 2000 and 1999. Average balances are
derived from daily average balances. The yields and costs include fees which are
considered adjustments to yields.
20
NINE MONTHS ENDED SEPTEMBER 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 ................ $ 14,414 $ 657 6.09% $ 13,646 $ 495 4.84%
Debt securities (2) ................... 176,408 7,992 6.04 224,083 9,747 5.80
Equity securities (2) ................. 31,117 1,294 5.54 38,527 1,139 3.94
Mortgage loans (3)(4) ................. 629,238 39,211 8.31 568,191 34,638 8.13
Money market loan participations ...... 26,860 1,322 6.56 35,150 1,352 5.13
Other commercial loans (3) ............ 24,543 1,517 8.24 13,995 825 7.86
Consumer loans (3) .................... 1,969 146 9.89 1,885 133 9.41
Lighthouse debt securities (2) ........ 5,345 287 7.16 -- -- --
Lighthouse mortgage loans (3) ......... 4,652 265 7.60 -- -- --
--------- ------- --------- ---------
Total interest-earning assets ...... 914,546 52,691 7.68 895,477 48,329 7.20
------- ----- --------- -----
Allowance for loan losses ............... (14,080) (13,329)
Non-interest earning assets ............. 25,895 16,842
--------- ---------
Total assets ....................... $ 926,361 $ 898,990
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits - Brookline:
NOW accounts ....................... $ 47,656 $ 438 1.23% $ 43,634 $ 404 1.23%
Savings accounts (5) ............... 12,245 202 2.20 13,152 219 2.22
Money market savings accounts ...... 204,950 6,020 3.92 188,392 5,484 3.88
Certificate of deposit accounts .... 244,329 9,940 5.42 242,860 9,360 5.14
--------- ------- --------- ---------
Total deposits - Brookline ....... 509,180 16,600 4.35 488,038 15,467 4.23
Deposits - Lighthouse:
Transaction accounts .............. 1,656 58 4.67 -- -- --
Certificate of deposit accounts .... 723 37 6.82 -- -- --
--------- ------- --------- ---------
Total deposits - Lighthouse ...... 2,379 95 5.32 -- -- --
Borrowed funds ........................ 115,243 5,241 6.06 106,147 4,815 6.05
--------- ------- --------- ---------
Total interest bearing liabilities 626,802 21,936 4.66 594,185 20,282 4.55
------- ---- --------- -------
Non-interest-bearing demand
checking accounts .................... 13,715 12,326
Other liabilities ....................... 11,129 13,834
--------- ---------
Total liabilities ................ 651,646 620,345
Stockholders' equity .................... 274,715 278,645
--------- ---------
Total liabilities and
stockholders' equity ......... $ 926,361 $ 898,990
========= =========
Net interest income (tax equivalent
basis)/interest rate spread (6) ....... 30,755 3.02% 28,047 2.65%
==== ====
Less adjustment of tax exempt income .... 252 232
--------- ---------
Net interest income (4) ................. $ 30,503 $ 27,815
========= =========
Net interest margin (7) ................. 4.48% 4.18%
==== ====
- ---------
(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 $25 for an interest rate
adjustment on a loan that relates to prior periods. Excluded from interest
income for the 1999 period is $232 collected from a borrower that relates to
prior periods.
(5) Savings accounts include mortgagors' escrow accounts.
(6) Net interest 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
$41.1 million in the 2000 period compared to $35.8 million in the 1999 period,
an increase of $5.3 million, or 14.8%. The additional income resulted from an
increase in average loans outstanding of $76.3 million, or 13.1%, between the
two nine month periods. The average rate earned on loans increased from 8.18% in
the 1999 period to 8.30% in the 2000 period. The rate improvement was
attributable to the same reasons that caused the increase between the 2000 and
1999 third quarter periods.
21
The average balances invested in money market loan participations during the
2000 and 1999 periods were $26.9 million and $35.2 million, respectively, and
the yields earned on those balances were 6.56% and 5.13%, respectively. Interest
income on debt securities declined 15.1% from $9.7 million in the 1999 period to
$8.3 million in the 2000 period as a result of a $41.3 million, or 18.4%,
reduction in the average balances invested in debt securities between the two
periods. Yields earned on debt securities improved from 5.80% in the 1999 period
to 6.04% 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 third quarter periods.
INTEREST EXPENSE
Interest expense on deposits was $16.7 million in the 2000 period, a 7.9%
increase from the $15.5 million expended in the 1999 period. The increase was
due to a $23.5 million, or 4.8%, 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 4.35% in the 2000 period.
Average borrowings from the FHLB increased from $106.1 million in the 1999
period to $115.2 million in the 2000 period. The average rates paid on those
balances were 6.05% and 6.06%, respectively.
NON-INTEREST INCOME
Gains on sales of marketable equity securities were $6.5 million in the 2000
period and $5.6 million in the 1999 period. The higher level of income from
other real estate owned ($759,000 in the 1999 period compared to $83,000 in the
2000 period) resulted primarily from the sale of a foreclosed property in the
third quarter of 1999 at a gain of $615,000. The increase in other non-interest
income from $12,000 in the 1999 period to $331,000 in the 2000 period resulted
primarily from $254,000 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 $1.1 million in the 2000 period compared to
$2.9 million in the 1999 period. Expenses related to Lighthouse were $3.2
million (including $746,000 of start-up expenses) in the 2000 period and
$272,000 in the 1999 period, all of which were start-up expenses.
Excluding RRP and Lighthouse exepnses, total non-interest expense increased
$589,000, or 8.0%, from $7.3 million in the 1999 period to $7.9 million in the
2000 period. Most of the increase resulted from higher personnel costs (up
$171,000, or 3.7%), higher marketing expenses (up $151,000, or 40.3%), higher
data processing expenses ($95,000, or 20.6%) and higher professional fees
($159,000, or 67.1%). Marketing efforts were expanded so as to attract new
deposit customers from other financial institutions going through divestitures.
Data processing expenses were higher because amounts billed for services in 1999
were discounted from normal rates due to a vendor not meeting certain
performance criteria. The higher professional fees resulted from special
corporate initiatives and a review of security controls pertaining to the
electronic banking capabilities of Brookline.
INCOME TAXES
The effective rate of income taxes was 35.3% in the 2000 period compared to
35.5% in the 1999 period. State income taxes remained at low levels for the same
reasons stated in the analysis of third quarter results.
PROJECTED IMPACT OF LIGHTHOUSE ON FUTURE OPERATING RESULTS
As previously stated herein and in prior 10-Q filings, Lighthouse will likely
incur significant losses in at least its first two years of operations.
After-tax losses of Lighthouse, including foregone income on the Company's $25
million capital investment in Lighthouse, amounted to $2.1 million in the nine
months ended September 30, 2000; the 2000 fourth quarter after-tax loss
(including foregone income) is expected to be in the range of $1.1 million to
$1.2 million. A projection of estimated loss for the year 2001 will be made in
the fourth quarter of 2000 in
22
connection with the annual budget and planning process of the Company. All
estimates regarding future operating results constitute forward-looking
statements (within the meaning of the Private Securities Litigation Reform
Act of 1999) and are subject to risks and uncertainties that could cause
actual results to differ materially. Factors that might cause such
differences 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
September 30, 2000, interest-earning assets maturing or repricing within one
year amounted to $349.1 million and interest-bearing liabilities maturing or
repricing within one year amounted to $473.5 million resulting in a cumulative
one year negative gap position of $124.4 million, or 12.8% 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 securities and borrowings from the FHLB. While
maturities and scheduled amortization of loans and investments are predictable
sources of funds, deposit flows and mortgage loan prepayments are greatly
influenced by interest rate trends, economic conditions and competition.
During the past few years, the combination of 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 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 nine months ended September 30, 2000, the Company
repaid advances of $12.3 million and obtained new advances of $33.9 million.
Total advances outstanding at September 30, 2000 amounted to $130.4 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 September 30, 2000, such assets amounted to $81.9
million, or 8.5% of total assets.
At September 30, 2000, the Company and its two bank subsidiaries exceeded all
regulatory capital requirements. At that date, Brookline's leverage capital was
$198.7 million, or 22.7% of its adjusted assets, and Lighthouse's leverage
capital was $23.0 million, or 74.9% of its adjusted assets. The minimum required
leverage capital ratio is 3.00% to 5.00% depending on a bank's supervisory
rating.
23
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 September 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
On April 20, 2000, the Company held its annual meeting of stockholders for
the purpose of the election of four Directors to three year terms. The Company's
Board of Directors is currently composed of fifteen members. The Company's
bylaws provide that approximately one-third of the Directors are to be elected
annually. Directors of the Company are generally elected to serve for a
three-year period and until their respective successors shall have been elected
and qualify.
The number of votes cast at the meeting was as follows:
NUMBER OF NUMBER OF
VOTES FOR VOTES WITHHELD
--------- --------------
Election of Directors:
Oliver F. Ames 25,507,155 225,099
Dennis S. Aronowitz 25,506,855 225,399
William G. Coughlin 25,510,555 221,699
Joseph J. Slotnik 25,509,655 222,599
ITEM 5. OTHER INFORMATION
None.
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit Index
10.1a Employment Agreement Between Brookline Bancorp, Inc. and
Thomas R. Venables
10.1b Employment Agreement Between Brookline Bancorp, Inc. and
Claire S. Bean
10.6 Fifth Amendment to the Brookline Savings Bank Employee Stock
Ownership Plan
10.6a Lighthouse Bank Stock Option Agreement with Thomas R. Venables
10.6b Lighthouse Bank Stock Option Agreement with Claire S. Bean
(B) 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.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
BROOKLINE BANCORP, INC.
Date: November 10, 2000 By: /s/ Richard P. Chapman, Jr.
---------------------------
Richard P. Chapman, Jr.
President and Chief
Executive Officer
Date: November 10, 2000 By: /s/ Paul R. Bechet
---------------------------
Paul R. Bechet
Senior Vice President and
Chief Financial Officer
26