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 MARCH 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
COMMISSION FILE NUMBER 0-23695
BROOKLINE BANCORP, INC.
(Exact name of registrant as specified in its charter)
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 - 27,430,572 shares outstanding as of
May 2, 2001.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets
as of March 31, 2001 and December 31, 2000 1
Consolidated Statements of Income for the three months
ended March 31, 2001 and 2000 2
Consolidated Statements of Comprehensive Income for the
three months ended March 31, 2001 and 2000 3
Consolidated Statements of Changes in Stockholders'
Equity for the three months ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000 6
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risks 20
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)
MARCH 31, DECEMBER 31,
2001 2000
------------- --------------
(UNAUDITED)
ASSETS
Cash and due from banks................................................ $ 12,498 $ 13,505
Short-term investments................................................. 55,884 66,870
Securities available for sale.......................................... 158,394 149,361
Securities held to maturity (market value of $37,849
and $50,337, respectively)........................................... 37,661 50,447
Restricted equity securities........................................... 7,464 7,145
Loans, excluding money market loan participations...................... 745,700 716,559
Money market loan participations....................................... 41,000 28,250
Allowance for loan losses.............................................. (14,483) (14,315)
--------- ----------
Net loans......................................................... 772,217 730,494
--------- ----------
Other investment ...................................................... 3,450 3,360
Accrued interest receivable............................................ 5,878 6,521
Bank premises and equipment, net....................................... 3,770 3,768
Deferred tax asset..................................................... 4,458 3,999
Other assets........................................................... 624 680
--------- ----------
Total assets...................................................... $ 1,062,298 $ 1,036,150
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................................................... $ 627,994 $ 608,621
Borrowed funds......................................................... 133,400 133,400
Mortgagors' escrow accounts............................................ 4,448 3,762
Income taxes payable................................................... 2,801 169
Accrued expenses and other liabilities................................. 7,516 7,613
--------- ----------
Total liabilities................................................. 776,159 753,565
--------- ----------
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........................................... 140,339 140,327
Retained earnings.................................................... 168,949 165,210
Accumulated other comprehensive income............................... 5,962 6,244
Treasury stock, at cost - 2,190,928 shares
and 2,185,928 shares, respectively................................. (23,052) (22,987)
Unearned compensation - recognition and retention plan............... (1,028) (1,070)
Unallocated common stock held by ESOP - 446,750 shares
and 455,771 shares, respectively.................................... (5,327) (5,435)
--------- ----------
Total stockholders' equity........................................ 286,139 282,585
--------- ----------
Total liabilities and stockholders' equity........................ $ 1,062,298 $ 1,036,150
========= ==========
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
MARCH 31,
-------------------------
2001 2000
--------- --------
(UNAUDITED)
Interest income:
Loans, excluding money market loan participations........................ $ 14,964 $ 13,189
Money market loan participations......................................... 539 250
Debt securities.......................................................... 2,674 2,859
Marketable equity securities............................................. 196 259
Restricted equity securities............................................. 129 110
Short-term investments................................................... 1,037 217
------ -------
Total interest income................................................. 19,539 16,884
------ -------
Interest expense:
Deposits................................................................. 6,855 5,340
Borrowed funds........................................................... 2,050 1,603
------ -------
Total interest expense ............................................... 8,905 6,943
------ -------
Net interest income........................................................ 10,634 9,941
Provision for loan losses.................................................. 164 150
------ -------
Net interest income after provision for loan losses................... 10,470 9,791
------ -------
Non-interest income:
Fees and charges......................................................... 297 203
Gains on sales of securities, net........................................ 2,802 2,342
Other real estate owned income, net...................................... - 18
SWAP market valuation charge............................................. (142) -
Other income............................................................. 131 71
------ -------
Total non-interest income............................................. 3,088 2,634
------ -------
Non-interest expense:
Compensation and employee benefits....................................... 2,273 1,586
Recognition and retention plan........................................... 42 397
Occupancy............................................................... 312 187
Equipment and data processing............................................ 861 291
Advertising and marketing................................................ 512 180
Internet bank start-up.................................................. - 567
Other ................................................................... 671 477
------ -------
Total non-interest expense............................................ 4,671 3,685
------ -------
Income before income taxes................................................. 8,887 8,740
Provision for income taxes................................................. 3,256 3,116
------ -------
Net income............................................................ $ 5,631 $ 5,624
====== =======
Weighted average common shares
outstanding during the period............................................ 26,884,552 27,154,027
========== ==========
Basic and diluted earnings per common share................................ $ 0.21 $ 0.21
==== ====
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
MARCH 31,
------------------------
2001 2000
--------- ----------
(UNAUDITED)
Net income................................................................. $ 5,631 $ 5,624
----- -----
Other comprehensive income, net of taxes:
Unrealized holding gains (losses)........................................ 2,273 (1,092)
Income tax expense (benefit)............................................. 831 (396)
----- ------
Net unrealized holding gains (losses).............................. 1,442 (696)
----- ------
Less reclassification adjustment for gains included in net income:
Realized gains........................................................ 2,802 2,342
Income tax expense.................................................... 1,078 840
----- ------
Net reclassification adjustment.................................... 1,724 1,502
----- -----
Total other comprehensive loss..................................... (282) (2,198)
----- -----
Comprehensive income....................................................... $ 5,349 $ 3,426
===== =====
See accompanying notes to the unaudited consolidated financial statements.
3
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (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......................... - - 5,624 - - - - 5,624
Unrealized loss on securities
available for sale, net of
reclassification adjustment..... - - - (2,198) - - - (2,198)
Common stock dividend of
$0.06 per share................. - - (1,655) - - - - (1,655)
Treasury stock purchases
(473,614 shares)............... - - - - (4,493) - - (4,493)
Compensation under recognition
and retention plan.............. - - - - - 397 - 397
Common stock acquired by ESOP
(84,386 shares)................. - - - - - - (802) (802)
Common stock held by ESOP
committed to be released
(8,952 shares).................. - (14) - - - - 108 94
----- ------- -------- ------- ------- ----- ------ -------
Balance at March 31, 2000.......... $ 296 $ 140,341 $ 154,067 $ 5,561 $(20,827) $ (1,919) $ (5,752) $271,767
==== ======= ======= ======= ====== ===== ======= =======
(Continued)
4
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (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, 2000....... $ 296 $ 140,327 $ 165,210 $ 6,244 $ (22,987) $ (1,070) $ (5,435) $ 282,585
Net income......................... - - 5,631 - - - - 5,631
Unrealized loss on securities
available for sale, net of
reclassification adjustment..... - - - (282) - - - (282)
Common stock dividend of
$0.07 per share................. - - (1,892) - - - - (1,892)
Treasury stock purchases
(5,000 shares)................ - - - - (65) - - (65)
Compensation under recognition
and retention plan.............. - - - - - 42 - 42
Common stock held by ESOP
committed to be released
(9,021 shares).................. - 12 - - - - 108 120
-------- ---------- ----------- -------- -------- ------ ------ ---------
Balance at March 31, 2001.......... $ 296 $ 140,339 $ 168,949 $ 5,962 $ (23,052) $ (1,028) $ (5,327) $ 286,139
======== ========== =========== ======== ======== ====== ====== =========
See accompanying notes to the unaudited consolidated financial statements.
5
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2001 2000
------------ -----------
(UNAUDITED)
Cash flows from operating activities:
Net income........................................................... $ 5,631 $ 5,624
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses........................................ 164 150
Release of ESOP shares........................................... 120 94
Depreciation and amortization.................................... 297 127
Amortization, net of accretion, of securities premiums
and discounts.................................................. 68 339
Accretion of deferred loan origination fees
and unearned discounts......................................... (103) (130)
Net gains from sales of securities available for sale............ (2,802) (2,342)
Equity interest in earnings of other investment.................. (90) (55)
SWAP market valuation charge..................................... 142 -
Compensation under recognition and retention plan................ 42 397
Deferred income taxes............................................ (212) (312)
(Increase) decrease in:
Accrued interest receivable.................................... 643 138
Other assets................................................... 56 (142)
Increase (decrease) in:
Income taxes payable........................................... 2,632 (378)
Accrued expenses and other liabilities......................... (239) (279)
------- --------
Net cash provided from operating activities.................. 6,349 3,231
------- --------
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale....... 2,909 2,765
Proceeds from redemptions and maturities of securities
available for sale................................................. 6,521 16,137
Proceeds from redemptions and maturities of securities
held to maturity................................................... 12,680 16,041
Purchase of securities available for sale............................ (16,152) (12,431)
Purchase of Federal Home Loan Bank of Boston stock................... (319) -
Net increase in loans................................................ (29,034) (25,459)
Proceeds from sales of participations in loans....................... - 7,383
Purchase of bank premises and equipment.............................. (299) (867)
Proceeds from sales of other real estate owned....................... - 6
------------ ---------
Net cash provided from (used for) investing activities....... (23,694) 3,575
------- ---------
(Continued)
6
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2001 2000
----------- ----------
(UNAUDITED)
Cash flows from financing activities:
Increase in demand deposits and NOW, savings and
money market savings accounts...................................... $ 33,782 $ 9,959
Increase (decrease) in certificates of deposit....................... (14,409) 2,430
Repayment of Federal Home Loan Bank of Boston advances............... - (2,000)
Increase in mortgagors' escrow deposits.............................. 686 418
Purchase of common stock for ESOP.................................... - (802)
Purchase of treasury stock........................................... (65) (4,493)
Payment of dividends on common stock................................. (1,892) (1,655)
------- -------
Net cash provided from financing activities.................... 18,102 3,857
------- -------
Net increase in cash and cash equivalents.............................. 757 10,663
Cash and cash equivalents at beginning of period....................... 108,625 33,038
------- -------
Cash and cash equivalents at end of period............................. $ 109,382 $ 43,701
======= ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds............................ $ 8,924 $ 6,948
Income taxes....................................................... 834 3,795
See accompanying notes to the unaudited consolidated financial statements.
7
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(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 three months ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001. Certain prior period
amounts have been reclassified to conform to current period
presentation.
(2) LIGHTHOUSE BANK (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 for the three months ended
March 31, 2001 and 2000 is as follows:
OPERATING EXPENSES START-UP EXPENSES
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2001 MARCH 31, 2000
------------------- -----------------
Compensation and benefits................ $ 535 $ 295
Occupancy................................ 71 68
Equipment and data processing............ 483 32
Advertising and marketing................ 358 84
Professional services.................... 13 58
Other.................................... 136 30
------ -----
$ 1,596 $ 567
===== =====
In April 2001, the Company decided to pursue the sale of Lighthouse to a
third party or to merge Lighthouse into Brookline Savings Bank
("Brookline"). It is expected that the sale or merger will take place in
the second or third quarter of 2001. In this regard, an after-tax
restructuring charge in the range of $3.0 million is expected to be
taken in the second quarter of 2001. This estimate does not take into
consideration any revenues that might result from the sale of Lighthouse
or any savings from contract negotiations and state income tax benefits
that might result from a merger. Lighthouse will continue to incur
operating losses until it is sold or merged.
8
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
(3) 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 MARCH 31, 2001
--------------------------
Interest income $ 17,991 $ 1,272 $ 2,379 $ (2,103) $ 19,539
Interest expense 8,559 799 - (453) 8,905
Provision for loan losses 110 54 - - 164
Securities gains 2,802 - - - 2,802
Other non-interest income 203 22 90 (29) 286
Non-interest expense 2,877 1,596 198 - 4,671
Income tax expense (benefit) 3,438 (404) 222 - 3,256
Net income (loss) 6,012 (751) 2,049 (1,679) 5,631
Total loans, excluding money
market loan participations $ 694,625 $ 51,075 $ - $ - $ 745,700
Total deposits 586,444 65,413 - (23,863) 627,994
Total assets 952,982 87,294 293,344 (271,322) 1,062,298
9
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
ALL CONSOLIDATION
BROOKLINE LIGHTHOUSE OTHER ADJUSTMENTS CONSOLIDATED
AT OR FOR THE THREE MONTHS --------- ---------- ----- ----------- ------------
ENDED MARCH 31, 2001
--------------------------
Interest income $ 16,111 $ - $ 9,063 $ (8,290) $ 16,884
Interest expense 7,058 - - (115) 6,943
Provision for loan losses 150 - - - 150
Securities gains 2,342 - - - 2,342
Other non-interest income 261 - 55 (24) 292
Start-up expenses - 567 - - 567
Other non-interest expense 2,990 - 128 - 3,118
Income tax expense (benefit) 3,020 (237) 333 - 3,116
Net income (loss) 5,496 (330) 8,657 (8,199) 5,624
Total loans, excluding money
market loan participations $ 653,765 $ - $ - $ - $ 653,765
Total deposits 524,525 - - - 524,525
Total assets 858,541 - 277,485 (221,575) 914,451
(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 ended March 31, 2001 and 2000 are as follows:
WEIGHTED NET INCOME
NET INCOME AVERAGE SHARES PER SHARE
-------------------- ------------------------- ---------------
2001 2000 2001 2000 2001 2000
---------- -------- ------------- ------------ ---- ----
(IN THOUSANDS)
Three months
ENDED MARCH 31,
Basic $ 5,631 $ 5,624 26,884,552 27,154,027 $ 0.21 $ 0.21
Effect of dilutive
stock options - - 107,474 - - -
-------- --------- ----------- ---------- ----- -------
Dilutive $ 5,631 $ 5,624 26,992,026 27,154,027 $ 0.21 $ 0.21
===== ===== ========== ========== ==== =====
(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 March 31, 2001 and December 31, 2000, such taxes amounted to $3,393
and $3,641, respectively.
10
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
(6) COMMITMENTS AND SWAP AGREEMENT (DOLLARS IN THOUSANDS)
At March 31, 2001, the Company had outstanding commitments to originate
loans of $64,727, $45,620 of which were commercial real estate and
multi-family mortgage loans. Unused lines of credit available to
customers were $24,109, $13,581 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
three months ended March 31, 2001 and 2000 was $(1) and $2,
respectively.
Effective January 1, 2001, the Company adopted SFAS No.133, "Accounting
for Derivative Instruments and Hedging Activities". That Statement
requires the Company to recognize all derivatives as either assets or
liabilities in its balance sheet and to measure those instruments at
fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and resulting designation.
The Company's interest-rate swap agreement did not meet the criteria to
designate it as a hedging instrument. Accordingly, changes in the fair
value of the outstanding swap agreement are recognized as charges or
credits to earnings. The pre-tax unrealized loss of $20 in the swap
agreement as of January 1, 2001 was not accounted for as the effect of a
change in accounting principle due to immateriality. Instead, that
amount was included in the pre-tax charge to earnings of $142 for the
three months ended March 31, 2001 resulting from accounting for the swap
agreement on a fair value basis.
(7) DIVIDEND DECLARATION
On April 19, 2001, the Board of Directors of the Company approved and
declared a regular quarterly cash dividend of $0.07 per share of common
stock to shareholders of record as of April 30, 2001 and payable on May
15, 2001.
(8) 1999 STOCK OPTION PLAN AND 1999 RECOGNITION AND RETENTION PLAN (DOLLARS
IN THOUSANDS)
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 were incentive stock options and
855,040 options were non-qualified stock options. Options awarded vest
over periods ranging from less than six months through five years. As of
March 31, 2001, 671,300 options had vested, 21,000 options were
forfeited and none were exercised.
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
11
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
April 19, 1999, 546,500 shares were awarded to officers and non-employee
directors of the Company. As of March 31, 2001, 428,707 shares had
vested and 3,850 shares had been forfeited . 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. Expense for
the three months ended March 31, 2001 and 2000 was $42 and $397,
respectively.
(9) 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 three months ended March 31, 2001 and 2000, $120 and $85,
respectively, were charged to compensation and employee benefits expense
based on the commitment to release 9,021 and 8,952 shares, respectively,
to eligible employees.
(10) PENSION BENEFITS (IN THOUSANDS)
On July 6, 2000, the Board of Directors of Brookline voted to terminate,
effective September 30, 2000, Brookline's defined benefit pension plan,
a non-contributory qualified retirement plan for eligible employees (the
"Plan"). In connection with the termination of the Plan, eligible
employees are being offered a single sum settlement equal to the value
of their benefits under the Plan. In addition, a portion of the surplus
of the Plan will be used to enhance benefits of eligible employees.
Final Plan termination is subject to approval by the Internal Revenue
Service and is expected to result in an after-tax gain in the second
quarter of 2001 in the range of $1,700. The actual amount of the gain
will be determined based on economic conditions as of future dates in
time.
Brookline amended its 401(k) plan so that, effective January 1, 2001, it
will contribute an amount equal to 5% of the compensation of eligible
employees. A similar defined contribution plan was established for
Lighthouse employees effective May 1, 2000. The total amounts charged
(credited) to earnings related to the pension plans for the three months
ended March 31, 2001 and 2000 were $71 and $(10), respectively.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MUTUAL HOLDING COMPANY STRUCTURE
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 March 31, 2001, Brookline Bancorp, MHC owned 56.18% of the Company's
outstanding common stock.
CONVERSION TO A FEDERAL CHARTER
On February 21, 2001, the Board of Directors approved a plan to convert the
Company's charter from a Massachusetts corporation regulated by the
Massachusetts Division of Banks and the Board of Governors of the Federal
Reserve System to a federal corporation regulated by the Office of Thrift
Supervision. The charter conversion was approved by the stockholders of the
Company on April 19, 2001 and is subject to approval by regulators.
Among other things, the charter conversion will permit the MHC to waive the
receipt of dividends paid by the Company without causing dilution to the
ownership interests of the Company's minority stockholders in the event of a
conversion of the MHC to stock form. The waiving of dividends will increase
Company resources available for stock repurchases, payment of dividends to
minority stockholders and investments.
LIGHTHOUSE BANK
On August 12, 1999, the Company filed an application with bank regulators to
form a new wholly-owned Massachusetts-chartered stock savings bank subsidiary to
be called Lighthouse Bank ("Lighthouse"). On April 12, 2000, the Company
received regulatory approval for 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 million capital investment in
Lighthouse at the beginning of May 2000. See notes 2 and 3 of the notes to the
unaudited consolidated financial statements on pages 8 through 10 herein for
information about the start-up expenses and operating results of Lighthouse and
"Future Events" below.
FUTURE EVENTS
In April 2001, the Company decided to sell Lighthouse to a third party or to
merge it into Brookline. That decision was reached after determining the amount
of additional operating losses Lighthouse would likely incur before achieving
satisfactory profitability.
It is expected that Lighthouse will be sold to a third party or merged into
Brookline in the second or third quarter of 2001. In this regard, an after-tax
restructuring charge in the range of $3.0 million is expected to be taken in the
second quarter of 2001. This estimate does not take into consideration any
revenues that might result from the sale of Lighthouse or any savings from
contract negotiations and state income tax benefits that might result from a
merger. Lighthouse will continue to incur operating losses until it is sold or
merged.
The restructuring charge relating to Lighthouse is expected to be partially
offset by an after-tax gain in the range of $1.7 million from termination of the
Company's defined benefit pension plan. Termination of the plan is subject to
approval by the Internal Revenue Service and the actual amount of the gain will
be determined based on economic conditions as of future dates in time. The
defined benefit plan will be replaced with a defined contribution plan. See note
10 of the notes to the unaudited financial statements on page 12 herein for
additional information about this matter.
13
For each of the past eight quarters, the Company has realized after-tax gains
from the sale of marketable equity securities in the range of $1.1 million to
$1.7 million. These gains have effectively offset Lighthouse losses and
recognition and retention plan expense. It is not expected that securities gains
will be realized in the second quarter of 2001. Operating earnings, exclusive of
Lighthouse, should continue to be in the range experienced during the past
several quarters. Achievement of all the projections mentioned herein will
depend in part on factors outside the control of the Company and, accordingly,
cannot be assured.
This quarterly report on form 10-Q contains statements about future events that
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. 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, but are not limited to, (1) higher or lower than expected net expenses
relating to the contemplated sale or merger of Lighthouse; (2) the extent or
timing of realization of the estimated gain from the termination of the
Company's pension plan; (3) difficulties encountered in completing the Company's
charter conversion plans; (4) a significant increase in competitive pressures
among depository institutions; (5) changes in the interest rate environment; (6)
less favorable general economic conditions; and (7) adverse legislation or
regulatory changes affecting the Company's business.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2001 AND DECEMBER 31, 2000
Total assets increased $26.1 million, or 2.5%, from $1.036 billion at December
31, 2000 to $1.062 billion at March 31, 2001. Of that growth, $12.3 million
occurred at Lighthouse.
Excluding money market loan participations, the loan portfolio increased $29.1
million, or 4.1%, since December 31, 2000, $17.7 million of which occurred at
Lighthouse. Substantially all of the loan growth at Lighthouse was in the
residential mortgage loan sector. Loan growth at Brookline was primarily in the
multi-family and commercial real estate mortgage sectors. Money market loan
participations amounted to $41.0 million at March 31, 2001 compared to $28.3
million at December 31, 2000. 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 lower yielding
short-term investments.
Securities available for sale and held to maturity declined modestly in the
aggregate from $199.8 million at December 31, 2000 to $196.1 million at March
31, 2001. Between those dates, investments in corporate obligations and U.S.
Government and Agency obligations declined $6.8 million and $4.0 million,
respectively, while investments in collateralized mortgage obligations increased
$7.7 million to $76.8 million at March 31, 2001. Most of the corporate and U.S.
Government and Agency obligations mature within two years and the collateralized
mortgage obligations generally mature within three or four years.
Total deposits were $628.0 million at March 31, 2001 compared to $608.6 million
at December 31, 2000, an increase of $19.4 million, or 3.2%. Between those
dates, deposits at Lighthouse grew $13.0 million, or 24.8%, $12.3 million of
which was in NOW accounts and money market savings accounts. During the first
quarter of 2001, Brookline's transaction deposit accounts grew $21.5 million
while its certificate of deposit accounts declined $15.1 million. Much of the
decline and part of the increase resulted primarily from the transfer of funds
in maturing high yielding six month certificates of deposit into premium money
market savings accounts.
Total borrowed funds remained unchanged at $133.4 million during the first
quarter of 2001. Such funds, all of which were advances from the Federal Home
Loan Bank of Boston ("FHLB"), were borrowed in connection with the Company's
management of the interest rate sensitivity of its assets and liabilities.
Total stockholders' equity increased from $282.6 million at December 31, 2000 to
$286.1 million at March 31, 2001 primarily as a result of net earnings for the
first quarter of 2001 of $5.6 million and cash dividends paid to
14
stockholders of $1.9 million, or $0.07 per share. During the quarter, the
Company repurchased 5,000 shares of its common stock. As of March 31, 2001, the
Company can purchase an additional 262,381 shares under a repurchase plan
approved on March 10, 2000.
Unrealized gains on securities available for sale are reported as accumulated
other comprehensive income. Such gains amounted to $9.4 million ($6.0 million on
an after-tax basis) at March 31, 2001 and $9.9 million ($6.2 million on an
after-tax basis) at December 31, 2000. The net decrease is after realization of
$2.8 million ($1.7 million on an after-tax basis) of gains from sales of
marketable equity securities during the first quarter of 2001.
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:
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(DOLLARS IN THOUSANDS)
Non-accrual loans $ - $ -
Other real estate owned - -
---------- ----------
Total non-performing assets $ - $ -
========== ==========
Restructured loans $ - $ -
========== ===========
Allowance for loan losses $ 14,483 $ 14,315
========== ===========
Allowance for loan losses as a percent
of total loans 1.84% 1.92%
Allowance for loan losses as a percent
of total loans, excluding money market
participation loans 1.94% 2.00%
Non-accrual loans as a percent of total loans -% -%
Non-performing assets as a percent of
total assets -% -%
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 $106,000 at March 31, 2001 and $107,000 at December 31, 2000.
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 three months ended March 31, 2001 and 2000, recoveries of loans
previously charged off amounted to $4,000 and $3,000, respectively, and there
were no loan charge-offs. Despite net loan recoveries and no non-performing
loans at March 31, 2001, the Company increased its allowance for loan losses by
providing $164,000 and $150,000 as charges to earnings in the first quarter of
2001 and 2000, respectively. Management deemed it prudent to increase the
allowance in light of the $29.1 million and $18.2 million increase in net loans
outstanding in the first three months of 2001 and 2000, respectively (exclusive
of money market loan participations). Over 60% of the net loan growth in the
first quarter of 2001 was in residential mortgage loans while most of the net
loan growth in the first quarter of 2000 occurred in the higher risk categories
of multi-family and commercial real estate mortgage loans. Of the total
provision in the 2001 period, $54,000 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.
15
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND
2000
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 March 31, 2001 and 2000 remained the same
at $5.6 million, or $0.21 per share. Basic and diluted earnings per share were
the same in each of the quarterly periods. The 2001 quarter included gains from
sales of marketable equity securities of $2.8 million ($1.7 million on an
after-tax basis, or $0.07 per share) compared to $2.3 million ($1.5 million on
an after-tax basis, or $0.06 per share) in the 2000 quarter. The 2001 and 2000
quarters also included expenses related to the 1999 recognition and retention
plan ("RRP") of $42,000 ($24,000 on an after-tax basis, or $0.00 per share) and
$397,000 ($231,000 on an after-tax basis, or $0.01 per share), respectively, and
after-tax net losses related to Lighthouse of $751,000 ($0.03 per share) and
$369,000 ($0.01 per share), respectively. Excluding these expenses and the
securities gains, and adding back the foregone income on the Company's $25
million investment in Lighthouse made at the beginning of May 2000, net
operating income was $4.9 million, or $0.18 per share, in the 2001 quarter
compared to $4.7 million, or $0.17 per share, in the 2000 quarter.
Average earning assets were $130 million, or 14%, higher in the first quarter of
2001 compared to the first quarter of 2000. Of this increase, $50 million
related to the activities of Lighthouse. The improved operating results derived
from this asset growth was offset in part by a decline in interest rate spread
from 2.97% in the 2000 quarter to 2.68% in the 2001 quarter. The decline was
primarily attributable to higher rates paid on six month certificates of deposit
obtained through promotions initiated in the fourth quarter of 2000 and three
reductions in the federal funds rate by the Federal Reserve in the first quarter
of 2001.
AVERAGE BALANCE SHEETS AND INTEREST RATES
The following table sets forth certain information relating to the Company for
the three months ended March 31, 2001 and 2000. 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.
16
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------
2001 2000
--------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST(1) COST BALANCE INTEREST(1) COST
---------- ----------- ------ ---------- ------------ -----
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Short-term investments..................... $ 72,584 $ 1,037 5.79% $ 15,234 $ 218 5.74%
Brookline debt securities (2).............. 159,306 2,514 6.31 194,730 2,859 5.87
Brookline equity securities (2)............ 31,324 396 5.06 32,237 462 5.73
Brookline mortgage loans (3)(4)............ 654,577 13,603 8.31 615,967 12,610 8.19
Brookline money market loan participations (3) 35,635 539 6.13 16,943 250 5.92
Brookline other commercial loans (3)....... 26,039 532 8.17 24,577 488 7.94
Brookline consumer loans (3)............... 2,108 55 10.44 1,912 46 9.62
Lighthouse debt securities (2)............. 8,959 160 7.14 - - -
Lighthouse mortgage loans (3).............. 40,886 759 7.43 - - -
Lighthouse consumer loans (3).............. 505 15 11.88 - - -
---------- ----------- --------- ---------
Total interest-earning assets........... 1,031,923 19,610 7.61 901,600 16,933 7.51
----------- ------ --------- ------
Allowance for loan losses................... (14,339) (13,910)
Non-interest earning assets.................. 29,572 21,682
---------- ---------
Total assets............................ $1,047,156 $ 909,372
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits - Brookline:
NOW accounts............................ $ 52,760 136 1.05% $ 47,575 145 1.22%
Savings accounts (5).................... 11,721 61 2.11 12,184 67 2.21
Money market savings accounts........... 199,138 1,856 3.78 202,886 1,971 3.90
Certificate of deposit accounts......... 278,161 4,003 5.84 242,843 3,157 5.21
----------- --------- --------- --------
Total deposits - Brookline............ 541,780 6,056 4.53 505,488 5,340 4.24
Deposits - Lighthouse:
Transaction accounts................... 28,026 308 4.46 - - -
Certificate of deposit accounts......... 29,611 491 6.72 - - -
----------- --------- --------- --------
Total deposits - Lighthouse........... 57,637 799 5.62 - - -
Borrowed funds............................. 133,400 2,050 6.23 107,541 1,603 5.98
----------- --------- --------- --------
Total interest bearing liabilities.... 732,817 8,905 4.93 613,029 6,943 4.54
--------- -------- --------- ------
Non-interest-bearing demand
checking accounts......................... 16,673 12,523
Other liabilities............................ 12,325 10,466
---------- ---------
Total liabilities..................... 761,815 636,018
Stockholders' equity......................... 285,341 273,354
---------- ---------
Total liabilities and
stockholders' equity.............. $1,047,156 $ 909,372
=========== =========
Net interest income (tax equivalent
basis)/interest rate spread (6)............ 10,705 2.68% 9,990 2.97%
==== ====
Less adjustment of tax exempt income......... 71 94
------- ------
Net interest income.......................... $10,634 $9,896
======= ======
Net interest margin (7)...................... 4.15% 4.43%
==== ====
- --------------------
(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 in the 2000 period is $45, which represents
interest collected on loans that relate 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.
17
INTEREST RATE ENVIRONMENT
On three separate occasions in the first quarter of 2001 and once in the month
of April 2001, the Federal Reserve reduced the federal funds rate by 50 basis
points, or 200 basis points in the aggregate. It is expected that these changes
will cause a decline in the average rate earned on the Company's earning assets
in the next few quarters of 2001. That portion of the Company's loan portfolio
that is priced on an adjustable rate basis will experience rate reductions while
that portion of the loan portfolio priced at fixed rates could experience loan
prepayments and refinancings. The Company's investment portfolio will likely
experience a decline in yields earned since most of its investments mature
within relatively short time periods.
It is also expected that rates paid on deposits (especially money market savings
accounts and certificates of deposit) and borrowed funds will decline in the
next few quarters of 2001. The extent and frequency with which the pricing of
deposits can take place varies by deposit product. For example, the extent to
which the pricing of NOW accounts and savings accounts can be reduced in a
significant declining rate environment is limited because of the lower rates
typically paid on those deposits. With respect to certificates of deposit and
borrowed funds, changes in rates paid can be significant, but the impact of the
changes depends on when the certificates or borrowings mature.
As of March 31, 2001, the aggregate amount of the Company's interest-bearing
liabilities either maturing or subject to repricing within three months exceeds
the aggregate amount of the Company's interest-earning assets that mature or are
subject to repricing within three months by $160.5 million, or 15.1% of total
assets. This is referred to as a negative gap position. Based on assets and
liabilities at March 31, 2001 maturing or subject to repricing within one year,
the Company had a negative gap position of $139.5 million, or 13.1% of total
assets. Based on these gap positions, the Company's interest rate spread should
improve in the second quarter of 2001 over that achieved in the first quarter of
2001. There can be no assurance, however, concerning this forecast since actual
results will depend on various economic factors, many of which are outside the
control of the Company.
INTEREST INCOME
Interest income on loans, excluding money market loan participations, was $15.0
million in the 2001 quarter compared to $13.2 million in the 2000 quarter, an
increase of $1.8 million, or 13.5%. The additional income resulted from an
increase in average loans outstanding of $81.7 million, or 12.7%, and an
increase in the average rate earned on loans from 8.18% in the 2000 quarter to
8.27% in the 2001 quarter. Of the growth in average loans outstanding, $41.4
million was at Lighthouse; such loans were comprised primarily of residential
mortgage loans. The average yield on the Lighthouse loans was 7.48% in the 2001
quarter.
The average balances invested in short-term investments during the first quarter
of 2001 and 2000 were $72.6 million and $15.2 million, respectively, and the
yields earned on those balances were 5.79% and 5.74%, respectively. The average
balances invested in money market loan participations during the first quarter
of 2001 and 2000 were $35.6 million and $16.9 million, respectively, and the
yields earned on those balances were 6.13% and 5.92%, respectively. It is
expected that the average balances invested in and the yields earned on
short-term investments and money market loan participations will decline in the
second quarter of 2001.
Interest income on debt securities declined 6.5% from $2.9 million in the 2000
quarter to $2.7 million in the 2001 quarter as a result of a $26.5 million, or
13.6%, reduction in the average balances invested in debt securities between the
two periods. Yields earned on debt securities improved from 5.87% in the 2000
quarter to 6.36% in the 2001 quarter.
INTEREST EXPENSE
Interest expense on deposits was $6.9 million in the 2001 quarter, a 28.4%
increase from the $5.3 million expended in the 2000 quarter. Most of the
increase was due to growth in the average balance of deposits of $93.9 million,
or 18.6%, from $505.5 million in the 2000 quarter to $599.4 million in the 2001
quarter. The average balance of deposits at Lighthouse was $57.6 million in the
first quarter of 2001. The average rates paid on deposits increased from 4.24%
in the 2000 quarter to 4.57% in the 2001 quarter; the average rate paid on
Lighthouse deposits was 5.62%.
18
Average borrowings from the FHLB increased from $107.5 million in the 2000
quarter to $133.4 million in the 2001 quarter. The average rates paid on those
balances were 5.98% and 6.23%, respectively.
NON-INTEREST INCOME
Gains on sales of marketable equity securities in the first quarter of 2001 and
2000 were $2.8 million and $2.3 million, respectively. Marketable equity
securities are held by the Company primarily for capital appreciation and not
for trading purposes. For each of the past eight quarters, the Company has
realized gains from sales of marketable equity securities in the range of $1.8
million to $2.8 million. These gains have effectively offset losses relating to
Lighthouse and the expense of the 1999 RRP. The Company does not contemplate
selling marketable equity securities in the second quarter of 2001. Sales
thereafter, if any, will be partly dependent on factors outside the control of
the Company and, accordingly, cannot be assured or anticipated.
Fees and charges increased from $203,000 in the 2000 quarter to $297,000 in the
2001 quarter as a result of higher fees from deposit related services and loan
prepayments. The increase in other income from $70,000 in the 2000 quarter to
$131,000 in the 2001 quarter was due to higher income from the Company's equity
interest in a specialty lease financing company and an equity interest in the
sale of a property on which the Company had made a loan.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In the first quarter of 2001,
the Company charged earnings by $142,000 in connection with accounting for an
outstanding swap agreement on a fair value basis. See note 6 of the notes to the
unaudited consolidated financial statements on page 11 herein for additional
information regarding this matter.
NON-INTEREST EXPENSE
Expense related to the RRP amounted to $42,000 in the 2001 quarter and $397,000
in the 2000 quarter (see note 8 of the notes to the unaudited consolidated
financial statements on pages 11 and 12 herein). Expenses related to Lighthouse
amounted to $1.6 million in the 2001 quarter and $567,000 in the 2000 quarter
(see note 2 of the notes to the consolidated financial statements on page 8
herein).
Excluding RRP and Lighthouse expenses, total non-interest expense increased
$312,000, or 11.5%, from $2.7 million in the 2000 quarter to $3.0 million in the
2001 quarter. Almost half of the increase was attributable to personnel costs
($152,000). Replacement of Brookline's defined benefit plan with a defined
contribution plan resulted in a $59,000 increase in pension expense, the cost of
Brookline's medical and dental benefit plans increased by $15,000 and the cost
of the ESOP plan (which is determined by the market value of the Company's
stock) increased by $35,000. Occupancy and data processing costs increased
primarily as a result of the opening of a new branch in the fourth quarter of
2000 and installation of new software for teller platforms and asset/liability
management. Higher professional fees resulting from an evaluation of strategic
alternatives relating to Lighthouse were partly offset by a decline in marketing
expenses.
INCOME TAXES
The effective rate of income taxes was 36.6% in the 2001 quarter compared to
35.7% in the 2000 quarter. The increase in rate is attributable primarily to the
lack of state income tax benefit on the operating losses of Lighthouse.
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
19
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
March 31, 2001, interest-earning assets maturing or repricing within one year
amounted to $417.4 million and interest-bearing liabilities maturing or
repricing within one year amounted to $556.9 million resulting in a cumulative
one year negative gap position of $139.5 million, or 13.1% of total assets. At
December 31, 2000, the Company had a cumulative one-year negative gap position
of $115.3 million, or 11.1% 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. Total advances outstanding at March 31, 2001 amounted to $133.4
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 March 31, 2001, such assets amounted to $119.6
million, or 11.3% of total assets.
At March 31, 2001, the Company and its two bank subsidiaries exceeded all
regulatory capital requirements. At that date, Brookline's leverage capital was
$211.4 million, or 22.21% of its adjusted assets, and Lighthouse's leverage
capital was $21.2 million, or 26.8% of its adjusted assets. The minimum required
leverage capital ratio is 3.00% to 5.00% depending on a bank's supervisory
rating.
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, 2000
For quantitative information about market risk, see pages 12 through 14 of the
Company's 2000 Annual Report.
Included in the Company's investment portfolio at March 31, 2001 was a $2.0
million bond issued by Southern California Edison payable June 1, 2001 and
bearing interest at 6.50% per annum. The market value of this debt security has
fluctuated significantly in the past few months and was $304,000 less than its
carrying value at March 31, 2001. Since repayment of this security at maturity
could depend on how the current electricity crisis in California is ultimately
resolved, the Company placed this investment on non-accrual status as of January
1, 2001.
There have been no material changes in the quantitative disclosures about market
risk as of March 31, 2001 from those presented in the Company's 2000 Annual
Report.
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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
See "Conversion to a Federal Charter" and "Future Events" in Item 2 of Part 1
on page 13 of this report.
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.
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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: May 2, 2001 By: /s/ Richard P. Chapman, Jr.
----------------------------
Richard P. Chapman, Jr.
President and Chief Executive Officer
Date: May 2, 2001 By: /s/ Paul R. Bechet
--------------------------------
Paul R. Bechet
Senior Vice President and Chief
Financial Officer
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