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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, 1999
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 - 28,429,800 shares outstanding as of
November 5, 1999.
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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, 1999 and December 31, 1998 1
Consolidated Statements of Income for the three months and
nine months ended September 30, 1999 and 1998 2
Consolidated Statements of Comprehensive Income for the
three months and nine months ended September 30, 1999 and 1998 3
Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998 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 22
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature Page 23
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,
1999 1998
--------------- --------------
(UNAUDITED)
ASSETS
Cash and due from banks................................................ $ 5,726 $ 6,657
Short-term investments................................................. 9,711 22,660
Securities available for sale.......................................... 129,575 133,529
Securities held to maturity (market value of $112,456
and $122,043, respectively).......................................... 113,150 121,390
Restricted equity securities........................................... 6,189 5,174
Loans, excluding money market loan participations 622,281 548,558
Money market loan participations....................................... 20,800 44,300
Allowance for loan losses.............................................. (13,719) (13,094)
---------- -----------
Net loans......................................................... 629,362 579,764
---------- -----------
Other investment....................................................... 3,001 -
Accrued interest receivable............................................ 6,575 6,457
Bank premises and equipment, net....................................... 1,326 1,184
Other real estate owned, net........................................... 763 1,940
Deferred tax asset..................................................... 2,840 -
Other assets........................................................... 353 272
---------- -----------
Total assets...................................................... $ 908,571 $ 879,027
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................................................... $ 504,567 $ 489,370
Borrowed funds......................................................... 111,300 94,350
Mortgagors' escrow accounts............................................ 3,860 3,308
Income taxes payable................................................... 6,421 5,843
Deferred income tax liability, net..................................... - 2,045
Accrued expenses and other liabilities................................. 6,190 5,889
---------- -----------
Total liabilities................................................. 632,338 600,805
---------- -----------
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, and 29,095,000 shares issued.......................... 296 291
Additional paid-in capital........................................... 140,381 134,490
Retained earnings.................................................... 146,615 135,282
Accumulated other comprehensive income............................... 9,289 14,416
Treasury stock, at cost - 1,108,200 shares
and 113,500 shares, respectively................................... (12,500) (1,316)
Unearned compensation - recognition and retention plan (2,998) -
Unallocated common stock held by ESOP - 392,755 shares
and 386,457 shares, respectively.................................... (4,850) (4,941)
---------- -----------
Total stockholders' equity........................................ 276,233 278,222
---------- -----------
Total liabilities and stockholders' equity........................ $ 908,571 $ 879,027
---------- -----------
---------- -----------
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,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED)
Interest income:
Loans, excluding money market loan participations........ $ 12,556 $ 11,510 $ 35,828 $ 32,622
Money market loan participations......................... 385 339 1,352 1,664
Debt securities.......................................... 3,136 3,257 9,747 8,817
Marketable equity securities............................. 226 192 639 544
Restricted equity securities............................. 95 67 268 182
Short-term investments................................... 140 641 495 1,752
--------- --------- --------- ---------
Total interest income................................. 16,538 16,006 48,329 45,581
--------- --------- --------- ---------
Interest expense:
Deposits................................................. 5,195 5,181 15,467 15,955
Borrowed funds........................................... 1,682 1,286 4,815 3,476
--------- --------- --------- ---------
Total interest expense ............................... 6,877 6,467 20,282 19,431
--------- --------- --------- ---------
Net interest income........................................ 9,661 9,539 28,047 26,150
Provision for loan losses.................................. - - 300 100
--------- --------- --------- ---------
Net interest income after provision for loan losses... 9,661 9,539 27,747 26,050
--------- --------- --------- ---------
Non-interest income:
Fees and charges......................................... 222 235 661 822
Gains on sales of securities, net........................ 1,989 426 5,587 1,672
Other real estate owned income, net...................... 651 64 759 165
Other income............................................. 3 2 12 10
--------- --------- --------- ---------
Total non-interest income............................. 2,865 727 7,019 2,669
--------- --------- --------- ---------
Non-interest expense:
Compensation and employee benefits....................... 1,517 1,465 4,589 4,206
Recognition and retention plan........................... 1,637 - 2,911 -
Occupancy................................................ 178 163 527 521
Equipment and data processing............................ 311 283 876 879
Advertising and marketing................................ 150 76 375 236
Internet bank start-up................................... 272 - 272 -
Other.................................................... 311 318 973 919
--------- --------- --------- ---------
Total non-interest expense............................ 4,376 2,305 10,523 6,761
--------- --------- --------- ---------
Income before income taxes................................. 8,150 7,961 24,243 21,958
Provision for income taxes................................. 2,872 2,836 8,618 7,920
--------- --------- --------- ---------
Net income............................................ $ 5,278 $ 5,125 $ 15,625 $ 14,038
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares
outstanding during the period 27,871,007 28,917,276 28,159,850 N/A
--------- --------- ---------
--------- --------- ---------
Earnings per common share:
Basic $ 0.19 $ 0.18 $ 0.55 N/A
Diluted 0.19 0.18 0.55 N/A
--------- --------- ---------
--------- --------- ---------
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,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED)
Net income................................................. $ 5,278 $ 5,125 $ 15,625 $ 14,038
--------- --------- --------- ---------
Other comprehensive income (loss), net of taxes:
Unrealized holding gains (losses)........................ (4,433) (2,149) (2,955) 537
Income tax expense (benefit)............................. (1,615) (692) (1,187) 299
---------- ---------- ---------- ---------
Net unrealized holding gains (losses).............. (2,818) (1,457) (1,768) 238
---------- ---------- ---------- ---------
Less reclassification adjustment for gains
included in net income:
Realized gains........................................ 1,989 426 5,587 1,672
Income tax expense.................................... 767 179 2,228 652
--------- --------- --------- ---------
Net reclassification adjustment.................... 1,222 247 3,359 1,020
--------- --------- --------- ---------
Total other comprehensive income (loss)............ (4,040) (1,704) (5,127) (782)
---------- --------- ---------- ----------
Comprehensive income....................................... $ 1,238 $ 3,421 $ 10,498 $ 13,256
---------- --------- ---------- ----------
---------- --------- ---------- ----------
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, 1999 AND 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
UNALLOCATED
ACCUMULATED UNEARNED COMMON
ADDITIONAL OTHER COMPENSATION - STOCK
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY RECOGNITION AND HELD BY
STOCK CAPITAL EARNINGS INCOME STOCK RETENTION PLAN ESOP
-------- ----------- --------- -------------- ---------- ---------------- -----------
Balance at December 31, 1997....... $ - $ - $ 119,018 $ 13,739 $ - $ - $ -
Net income......................... - - 14,038 - - - -
Unrealized gain on securities......
available for sale, net of
reclassification adjustment..... - - - (782) - - -
Net proceeds of stock offering
and issuance of common
stock (29,095,000 shares)....... 291 134,499 - - - - -
Common stock dividend of
$0.05 per share................. - - (1,448) - - - -
Common stock acquired by
ESOP (278,500 shares)........... - - - - - - (3,777)
Common stock held by ESOP
committed to be released
(13,704 shares)................. - (7) - - - - 210
-------- --------- ------------ --------- --------- -------- ---------
Balance at September 30, 1998...... $ 291 $134,492 $ 131,608 $ 12,957 $ - $ - $ (3,567)
-------- --------- ------------ --------- --------- -------- ---------
-------- --------- ------------ --------- --------- -------- ---------
TOTAL
STOCKHOLDERS'
EQUITY
---------------
Balance at December 31, 1997....... $ 132,757
Net income......................... 14,038
Unrealized gain on securities......
available for sale, net of
reclassification adjustment..... (782)
Net proceeds of stock offering
and issuance of common
stock (29,095,000 shares)....... 134,790
Common stock dividend of
$0.05 per share................. (1,448)
Common stock acquired by
ESOP (278,500 shares)........... (3,777)
Common stock held by ESOP
committed to be released
(13,704 shares)................. 203
-----------
Balance at September 30, 1998...... $ 275,781
-----------
-----------
(Continued)
4
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
UNEARNED UNALLOCATED
ACCUMULATED COMPENSATION- COMMON
ADDITIONAL OTHER RECOGNITION STOCK
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY AND RETENTION HELD BY
STOCK CAPITAL EARNINGS INCOME STOCK PLAN ESOP
-------- ----------- --------- ------------- -------- --------------- ---------
Balance at December 31, 1998....... $ 291 $ 134,490 $ 135,282 $ 14,416 $ (1,316) $ - $ (4,941)
Net income......................... - - 15,625 - - - -
Unrealized loss on securities
available for sale, net of
reclassification adjustment..... - - - (5,127) - - -
Common stock dividends
of $.15 per share............... - - (4,292) - - - -
Treasury stock purchases
(994,700 shares)................ - - - - (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 -
Common stock acquired by ESOP
(20,000 shares)................. - - - - - - (200)
Common stock held by ESOP
committed to be released
(23,702 shares)................. - (13) - - - - 291
------- ---------- --------- -------- --------- -------- ---------
Balance at September 30, 1999...... $296 $ 140,381 $146,615 $ 9,289 $ (12,500) $ (2,998) $ (4,850)
------- ---------- --------- -------- --------- -------- ---------
------- ---------- --------- -------- --------- -------- ---------
TOTAL
STOCKHOLDERS'
EQUITY
--------------
Balance at December 31, 1998....... $ 278,222
Net income......................... 15,625
Unrealized loss on securities
available for sale, net of
reclassification adjustment..... (5,127)
Common stock dividends
of $.15 per share............... (4,292)
Treasury stock purchases
(994,700 shares)................ (11,184)
Common stock issued in
conjunction with the recognition
and retention plan..............
(546,500 shares)................ -
Compensation under recognition
and retention plan.............. 2,911
Common stock acquired by ESOP
(20,000 shares)................. (200)
Common stock held by ESOP
committed to be released
(23,702 shares)................. 278
-----------
Balance at September 30, 1999...... $ 276,233
-----------
-----------
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,
--------------------------
1999 1998
-------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net income........................................................... $15,625 $ 14,038
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses........................................ 300 100
Compensation under recognition and retention plan................ 2,911 -
Release of ESOP shares........................................... 278 203
Depreciation and amortization.................................... 406 342
Amortization, net of accretion, of securities premiums
and discounts.................................................. 1,248 654
Accretion of deferred loan origination fees
and unearned discounts......................................... (405) (372)
Net gains from sales of securities available for sale............ (5,587) (1,672)
Net gains from sales of other real estate owned.................. (615) (3)
Deferred income taxes............................................ (1,531) (291)
(Increase) decrease in:
Accrued interest receivable.................................... (118) (1,296)
Other assets................................................... (81) 642
Increase (decrease) in:
Income taxes payable........................................... 639 (1,635)
Accrued expenses and other liabilities......................... 301 (811)
-------- ---------
Net cash provided by operating activities.................... 13,371 9,899
-------- ---------
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale....... 5,817 3,033
Proceeds from redemptions and maturities of securities
available for sale................................................. 37,040 32,441
Proceeds from redemptions and maturities of securities
held to maturity................................................... 36,299 13,270
Purchase of securities available for sale............................ (42,095) (55,003)
Purchase of securities held to maturity.............................. (29,070) (65,287)
Purchase of Federal Home Loan Bank of Boston stock................... (984) (703)
Purchase of other restricted equity securities....................... (31) -
Net increase in loans................................................ (77,743) (55,267)
Funding of other investment.......................................... (3,001) -
Proceeds from sales of participation in loans........................ 4,750 1,691
Purchase of bank premises and equipment.............................. (520) (162)
Capital expenditures on other real estate owned...................... (30) (90)
Proceeds from sales of other real estate owned....................... 1,794 55
-------- ---------
Net cash used for investing activities....................... (67,774) (126,022)
-------- ---------
(Continued)
6
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
-------- ---------
(UNAUDITED)
Cash flows from financing activities:
Increase (decrease) in demand deposits and NOW, savings and
money market savings accounts...................................... $ 24,326 $ (866)
Decrease in certificates of deposit.................................. (9,129) (11,360)
Proceeds from Federal Home Loan Bank of Boston advances.............. 32,500 29,950
Repayment of Federal Home Loan Bank of Boston advances............... (15,550) (20,800)
Increase in mortgagors' escrow accounts.............................. 552 532
Net proceeds from issuance of common stock........................... - 134,790
Purchase of common stock for ESOP.................................... (200) (3,777)
Payment of dividends on common stock................................. (4,292) (1,448)
Purchase of treasury stock........................................... (11,184) -
--------- ---------
Net cash provided by financing activities...................... 17,023 127,021
--------- ---------
Net increase (decrease) in cash and cash equivalents................... (37,380) 10,898
Cash and cash equivalents at beginning of period....................... 73,617 44,513
--------- ---------
Cash and cash equivalents at end of period............................. $ 36,237 $ 55,411
--------- ---------
--------- ---------
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest on deposits and borrowed funds............................ $ 20,231 $ 19,398
Income taxes....................................................... 9,501 9,845
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, 1999 AND 1998
(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, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999.
(2) REORGANIZATION AND STOCK OFFERING (DOLLARS IN THOUSANDS)
Brookline Bancorp, Inc. (the "Company") is a Massachusetts corporation
that was organized in November 1997 at the direction of the Board of
Trustees of Brookline Savings Bank (the "Bank") for the purpose of
acquiring all of the capital stock of the Bank upon completion of the
Bank's reorganization from a mutual savings bank into a mutual holding
company structure. As part of the reorganization, the Company offered
for sale 47% of the shares of its common stock in an offering fully
subscribed for by eligible depositors of the Bank (the "Offering"). The
remaining 53% of the Company's shares of common stock were issued to
Brookline Bancorp, MHC (the "MHC"), a state-chartered mutual holding
company incorporated in Massachusetts. The reorganization and Offering
were completed on March 24, 1998. Prior to that date, the Company had no
assets or liabilities. The reorganization has been accounted for as an
"as if" pooling with assets and liabilities recorded at historical cost.
Completion of the Offering resulted in the issuance of 29,095,000 shares
of common stock, 15,420,350 shares (53%) of which were issued to the MHC
and 13,674,650 shares (47%) of which were sold to eligible depositors of
the Bank at $10.00 per share. Net proceeds from the Offering amounted to
$134.8 million. The Company contributed 50% of the net proceeds of the
Offering to the Bank for general corporate use. Net Offering proceeds
retained by the Company were used to fund a loan to the Bank's employee
stock ownership plan and acquire short-term investments and investment
securities.
As part of the Offering and as required by regulation, the Bank
established a liquidation account equal to $58,924 for the benefit of
eligible account holders and supplemental eligible account holders who
maintain their deposit accounts at the Bank after the Offering. In the
unlikely event of a complete liquidation of the Bank (and only in that
event), eligible depositors who continue to maintain deposit accounts at
the Bank shall be entitled to receive a distribution from the
liquidation account. The liquidation account is reduced annually to the
extent that eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases in deposit
account balances do not restore an account holder's interest in the
liquidation account. The liquidation account approximated $18,893 at
December 31, 1998, the latest anniversary date.
The Company and the Bank may not declare or pay dividends on and the
Company may not repurchase any of its shares of common stock if the
effect thereof would cause stockholders' equity to be reduced below the
required liquidation account balance or minimum regulatory capital
levels.
(3) EMPLOYEE STOCK OWNERSHIP PLAN (DOLLARS IN THOUSANDS)
On March 24, 1998, the Board of Directors of the Bank approved an
employee stock ownership plan (the "ESOP"). All employees meeting age
and service requirements are eligible to participate in the ESOP.
8
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
The ESOP is authorized to purchase up to 4% of the common stock sold in
the Offering, or 546,986 shares, in the open market and to borrow up to
$7,500 from the Company to finance the purchase of such shares. The loan
is payable in quarterly installments over 30 years and bears interest at
8.50% per annum. The loan can be prepaid without penalty. Loan payments
are principally funded by cash contributions from the Bank and dividends
on unallocated shares of Company stock held by the ESOP, subject to IRS
limitations.
Through September 30, 1999, the ESOP has purchased 437,600 shares of
common stock in the open market at an aggregate cost of $5,550. For the
nine months ended September 30, 1999 and 1998, $270 and $203,
respectively, was charged to compensation and employee benefits expense
based on the commitment to release 23,702 and 13,704 shares to eligible
employees.
(4) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of shares outstanding during the periods
presented. Diluted earnings per share gives effect to all dilutive
potential shares resulting from options that were outstanding during the
periods presented.
The components of basic and diluted earnings per share for the three
months and nine months ended September 30, 1999 and 1998 are as follows:
WEIGHTED NET INCOME
NET INCOME AVERAGE SHARES PER SHARE
--------------- ------------------ -------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
Three months
ended September 30
------------------
Basic $ 5,278 $ 5,125 27,871,007 28,917,276 $ 0.19 $ 0.18
Effect of dilutive
stock options - - 5,548 - - -
------- ------- ---------- ---------- ------ ------
Dilutive $ 5,278 $ 5,125 27,876,555 28,917,276 $ 0.19 $ 0.18
------- ------- ---------- ---------- ------ ------
------- ------- ---------- ---------- ------ ------
Nine months
ended September 30
------------------
Basic $ 15,625 $ 14,038 28,159,850 N/A $ 0.55 N/A
Effect of dilutive
stock options - - 7,752 N/A - N/A
------- ------- ---------- ------
Dilutive $ 15,625 $ 14,038 28,167,602 N/A $ 0.55 N/A
------- ------- ---------- ---------- ------ ------
------- ------- ---------- ---------- ------ ------
(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 September 30, 1999 and December 31, 1998, such taxes
amounted to $5,372 and $8,788, respectively.
9
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(6) COMMITMENTS AND SWAP AGREEMENT (DOLLARS IN THOUSANDS)
At September 30, 1999, the Company had outstanding commitments to
originate loans of $56,734, $35,466 of which were commercial real estate
and multi-family mortgage loans. Unused lines of credit available to
customers were $10,558, $9,234 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 expense paid for the nine months ended
September 30, 1999 and 1998 was $31and $6, respectively.
(7) DIVIDEND DECLARATION
On October 21, 1999, the Board of Directors of the Company approved and
declared a regular quarterly cash dividend of $.06 per share of common
stock to shareholders of record as of October 31, 1999 and payable on
November 12, 1999.
(8) 1999 STOCK OPTION PLAN AND 1999 RECOGNITION AND RETENTION PLAN
At the annual meeting of stockholders on April 15, 1999, the
stockholders approved the Company's 1999 Stock Option Plan (the "Stock
Option Plan") and the 1999 Recognition and Retention Plan (the "RRP").
Under the Stock Option Plan, 1,367,465 shares of the Company's common
stock have been 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, 1999, 390,000 shares are vested. If an
individual to whom a stock option was granted ceases to maintain
continuous service by reason of normal retirement, death or
disability, or following a change in control, all options and rights
granted and not fully exercisable become exercisable in full upon the
happening of such event and shall remain exercisable for a one year
period. The Company intends to account 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." Pro forma
disclosures of net income and earnings per share will be made as if
the fair value based method of accounting defined in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," had been applied.
Under the RRP, 546,986 shares of the Company's common stock have been
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
10
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
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. A significant number of shares vest in 1999
(227,125 shares on October 19, 1999) and 2000 (201,884 shares, primarily
in October). 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. Assuming all shares vest according to
the terms of the awards, the Company's pre-tax operating expenses 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 684
---------
3,595
---------
YEAR 2000
---------
First quarter 397
Second quarter 376
Third quarter 366
Fourth quarter 115
---------
1,254
--------
Year 2001 172
Year 2002 172
Year 2003 172
Year 2004 166
Year 2005 164
Year 2006 164
Year 2007 50
---------
$ 5,909
---------
---------
(9) ESTABLISHMENT OF A NEW INTERNET BANK SUBSIDIARY
On August 12, 1999, the Company filed an application with bank
regulators to form a new wholly-owned Massachusetts-chartered stock
savings bank subsidiary which will operate as an "internet bank". The
new bank will be called Lighthouse Bank. The Company intends to provide
Lighthouse Bank with $25 million in capital once regulatory approvals
are obtained. The Company is hopeful that Lighthouse Bank will commence
offering products and services to the public in the early part of the
second quarter of 2000.
11
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
During the three months ended September 30, 1999, the Company incurred
expenses of $272 in connection with the formation of Lighthouse Bank.
The expenses relate primarily to compensation, occupancy and legal fees.
Additional start-up expenses in the range $400,000 to $550,000 are
expected to be incurred in the fourth quarter of 1999. See "Item 2.
Management's Discussion and Analysis of Financial Condition and Results
of Operations- Projected Impact of New Internet Bank Subsidiary
(Lighthouse Bank) and Recognition Plan on Future Operating Results" for
information about future expected operating results of Lighthouse Bank.
12
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.
See note 2 to the unaudited consolidated financial statements for further
information about the reorganization and the Offering.
Prior to March 24, 1998, the Company had no assets or liabilities. Its
principal activities since that date through September 30, 1999 have been to
complete the Offering, acquire all of the capital stock of the Bank, contribute
50% of the net proceeds of the Offering to the Bank and use the remaining 50% of
the net proceeds to acquire investment securities and fund a loan to the Bank's
employee stock ownership plan.
The reorganization has been accounted for as an "as if" pooling with assets
and liabilities recorded at historical cost. The unaudited consolidated
financial statements include the accounts of the Company, the Bank and
subsidiaries of the Company and the Bank.
This quarterly report on Form 10-Q contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those contemplated by such forward-looking statements.
These important factors include, without limitation, the Bank's continued
ability to originate quality loans, fluctuation of interest rates, real estate
market conditions in the Bank's lending areas, general and local economic
conditions, the Bank's continued ability to attract and retain deposits, the
Company's ability to control costs, new accounting pronouncements and changing
regulatory requirements.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
Total assets increased by $29.5 million, or 3.4%, from $879.0 million at
December 31, 1998 to $908.6 million at September 30, 1999. Excluding money
market loan participations, the loan portfolio increased by $73.7 million, or
13.4%, from $548.6 million at December 31, 1998 to $622.3 million at September
30, 1999. Growth took place in the multi-family mortgage loan sector ($25.0
million, or 9.5%), the commercial real estate mortgage loan sector ($18.2
million, or 9.2%), the commercial loan sector ($17.2 million, or 132.1%) and the
one-to-four family mortgage loan sector ($7.6 million, or 11.7%). Changes in
other sectors of the loan portfolio were modest. Most of the growth in the
commercial loan sector was attributable to a $10 million participation maturing
in one year. Part of the growth in the loan portfolio was funded by a reduction
in money market loan participations from $44.3 million at December 31, 1998 to
$20.8 million at September 30, 1999. Generally, 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.
Total deposits were $504.6 million at September 30, 1999 compared to $489.4
million at December 31, 1998, an increase of $15.2 million, or 3.1%. Money
market savings accounts increased by $24.1 million, or 13.9%, while certificates
of deposit declined by $9.1 million, or 3.7%, between the two dates. The current
economic environment prompted depositors to place more of their funds in
accounts with shorter maturities or immediate availability.
The Company increased its borrowings from the Federal Home Loan Bank of
Boston ("FHLB") from $94.4 million at December 31, 1998 to $111.3 million at
September 30, 1999 as part of its efforts to manage interest rate
13
risk. As loan customers have sought to lock in fixed rates of interest for
several years, the Company has extended its use of borrowings with maturities in
the five year range.
Total stockholders' equity declined from $278.2 million at December 31, 1998
to $276.2 million at September 30, 1999. For the first nine months of 1999, net
income was $15.6 million and cash dividends paid to stockholders were $4.3
million, or $0.15 per share. During the nine months ended September 30, 1999,
the Company purchased 994,700 shares of the Company's common stock in the open
market at an aggregate cost of $11.2 million, or $11.24 per share. Such
purchases were made in connection with a stock repurchase plan approved by
regulators on October 20, 1998 allowing the Company to repurchase 1,454,750
shares, or 5.0%, of the total common shares outstanding. As of September 30,
1999, 1,108,200 shares were purchased at an aggregate cost of $12.5 million, or
$11.28 per share.
At the annual meeting of stockholders on April 15, 1999, the stockholders
approved the Company's 1999 Stock Option Plan and the 1999 Recognition and
Retention Plan. See note 8 to the unaudited consolidated financial statements on
pages 10 and 11 herein for information regarding the approved plans.
Unrealized gains on securities available for sale are reported as accumulated
other comprehensive income. Such gains amounted to $14.7 million ($9.3 million
on an after-tax basis) at September 30, 1999 and $23.2 million ($14.4 million on
an after-tax basis) at December 31, 1998. The net decrease is after realization
of $5.6 million ($3.4 million on an after-tax basis) of gains from sales of
marketable equity securities during the nine months ended September 30, 1999.
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,
1999 1998
------------ ------------
(Dollars in thousands)
Non-accrual loans:
Mortgage loans:
Commercial $ - $ 297
Home equity - 35
--------- ---------
Total non-accrual loans - 332
Other real estate owned, net of allowance
for losses of $36 and $186, respectively 763 1,940
--------- ---------
Total non-performing assets $ 763 $ 2,272
========= =========
Restructured loans $ - $ -
========== ==========
Allowance for loan losses $ 13,719 $ 13,094
========= =========
Allowance for loan losses as a percent
of total loans 2.13% 2.21%
Allowance for loan losses as a percent
of total loans, excluding money market
participation loans 2.20 2.39
Non-accrual loans as a percent of total loans 0.00 0.06
Non-performing assets as a percent of
total assets 0.08 0.26
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
14
same as the definition of "non-accrual loans," although the two categories tend
to overlap. Impaired loans amounted to $109,000 at September 30, 1999 and $1.3
million at December 31, 1998. None of the impaired loans at those dates required
a specific allowance for impairment due primarily to prior charge-offs and/or
the sufficiency of collateral values.
During the nine months ended September 30, 1999, recoveries of loans
previously charged off amounted to $325,000 and loan charge-offs were less than
$1,000. Despite the low level of non-performing loans, the Company increased its
allowance for loan losses by providing $150,000 as a charge to earnings in each
of the first and second quarters of 1999. It did not charge earnings in the
third quarter because of a $320,000 loan loss recovery during that period.
Management deemed it prudent to increase the allowance in light of the $73.7
million increase in net loans outstanding (exclusive of money market loan
participations) since December 31, 1998, most of which occurred in the higher
risk categories of multi-family and commercial real estate mortgage loans and
commercial loans.
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. Within one year, the working group
expects to issue guidance regarding (1) the procedures necessary for a reasoned
assessment of losses inherent in a loan portfolio, (2) documentation that should
exist to support the allowance and (3) enhanced disclosure of credit loss
allowances, including changes in risk factors and asset quality that affect
allowances for credit losses. It is not possible at this time to anticipate what
effect, if any, guidelines developed by the working group will have on the
financial condition or operating results of the Company.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998
GENERAL
Operating results are primarily dependent on the Company's net interest
income, which is the difference between the interest earned on the Company's
loan and investment portfolios and the interest paid on deposits and borrowings.
Operating results are also affected by provisions for loan losses, the level of
income from non-interest sources such as service fees and sales of investment
securities and other assets, operating expenses and income taxes. Operating
results are also significantly affected by general economic conditions,
particularly changes in interest rates, as well as government policies and
actions of regulatory authorities.
Net income for the three months ended September 30, 1999 was $5.3 million
($0.19 per share) compared to $5.1 million ($0.18) per share for the three
months ended September 30, 1998. The 1999 period included $2.0 million of gains
from sales of marketable equity securities ($1.2 million on an after-tax basis,
or $0.04 per share) compared to $426,000 ($247,000 on an after-tax basis, or
$0.01 per share) in the 1998 period. The 1999 and 1998 periods also included
interest collected on previously classified problem loans pertaining to prior
reporting periods of $224,000 and $480,000, respectively, ($145,000 and
$310,000, respectively, on an after-tax basis) and a gain on sale of a
foreclosed property in 1999 of $615,000 ($399,000 on an after-tax basis).
The 1999 period included $1.6 million of expense ($1.1 million on an
after-tax basis, or $0.04 per share) related to the recognition and retention
plan approved by the stockholders on April 15, 1999. (See note 8 to the
unaudited consolidated financial statements on pages 10 and 11 herein). The 1999
period also included $272,000 ($179,000 on an after-tax basis) of expense
related to the establishing of a new internet bank subsidiary to be called
Lighthouse Bank. An application has been filed requesting regulatory approval to
commence operations in the first few months of next year. Excluding income
derived from sales of securities and a foreclosed property and problem loan
collections and expenses related to the recognition and retention plan and
Lighthouse Bank, net income was
15
$4.7 million ($0.17 per share) in the 1999 period, or 3.9% higher than the $4.6
million ($0.16 per share) in the 1998 period.
Interest rate spread (the difference between yields earned on assets and
rates paid on deposits and borrowings) increased modestly from 2.67% in the
third quarter of 1998 to 2.68% in the third quarter of 1999. The average yield
on assets declined from 7.48% in the 1998 period to 7.23% in the 1999 period. A
falling interest rate environment resulted in lower yields on new loan
originations and investment purchases and a higher volume of prepayments of
loans originated in prior years at higher rates. The overall decline in yield on
earning assets was offset by a reduction in the average rate paid on deposits
and borrowed funds from 4.81% in the 1998 period to 4.55% in the 1999 period.
INTEREST INCOME
The average balance of interest-earning assets increased by $72.5 million, or
8.7%, from $834.1 million in the third quarter of 1998 to $906.6 million in the
third quarter of 1999. Loans (excluding money market loan participations)
accounted for 61.4% of total interest-earning assets in the 1998 period compared
to 67.2% in the 1999 period. Upon the conversion to stock in March 1998, the
Company invested much of the conversion proceeds in short-term investments and
investment securities with relatively short maturities. As a result, loans
represented only 59.3% of total interest-earning assets shortly after the
conversion. Since the conversion, the Company has sought to increase the percent
of total interest-earning assets represented by loans since loans generate a
higher yield than short-term investments and investment securities.
Interest income on loans, excluding money market loan participations, was
$12.6 million in the third quarter of 1999 compared to $11.5 million in the
third quarter of 1998, an increase of $1.1 million, or 9.1%. Excluding interest
collected on problem loans pertaining to prior reporting periods of $224,000 in
1999 and $480,000 in 1998, the rate of increase was 11.8%. The additional income
resulting from an increase in average loans outstanding of $97.4 million, or
19.0 %, in the third quarter of 1999 compared to the third quarter of 1998 was
partially offset by a decline in the average rate earned on loans from 8.62% in
the 1998 quarter to 8.09% in the 1999 quarter. The reduction in loan yield was
attributable to a falling interest rate environment. Historically, part of the
Company's loan portfolio was priced at adjustable rates tied to a published
prime rate. Cuts in the prime rate during the latter part of 1998 caused a
decline in the yield on the Company's adjustable rate loans. The falling rate
environment prompted some multi-family and commercial real estate borrowers to
convert their loans to fixed rate pricing for several years. Additionally, a
significant part of new loan production in the second half of 1998 and during
1999 was originated at prevailing market rates for fixed periods averaging five
to seven years. If interest rates increase during the fixed rate phase of these
new loans, net interest income could be negatively affected.
The average balance invested in money market loan participations during the
three months ended September 30, 1999 and 1998 were $28.6 million and $23.4
million, respectively, and the yields earned on those balances were 5.38% and
5.80%, respectively.
Interest income on short-term investments decreased 78.2% from $642,000 in
the third quarter of 1998 to $140,000 in the third quarter of 1999 as a result
of substantially reduced average balances in such investments ($45.9 million in
the 1998 period compared to $11.4 million in the 1999 period) and a reduction in
yields from 5.59% in the 1998 period to 4.89% in the 1999 period. Interest
income on debt securities decreased 3.3% from $3.3 million in the 1998 period to
$3.1 million in the 1999 period. The average balances invested in debt
securities decreased 1.1% from $219.5 million to $217.1 million and the yields
earned on such securities were 5.94% and 5.80% in the comparable periods.
INTEREST EXPENSE
While the average balance of deposits increased by $35.6 million, or 7.8%,
from $457.8 million in the third quarter of 1998 to $493.4 million in the third
quarter of 1999, the rates paid on such deposits declined from 4.53% in the 1998
period to 4.21% in the 1999 period. As a result, interest expense on deposits
remained unchanged at $5.2 million in the 1999 and 1998 periods. Most of the
growth in deposits was in money market savings accounts.
The Company increased its use of borrowings from the FHLB as part of its
management of interest rate risk. The
16
average balances of advances outstanding were $110.6 million in the third
quarter of 1999 compared to $80.0 million in the third quarter of 1998 and the
average rates paid on such balances were 6.08% and 6.44%, respectively.
PROVISION FOR LOAN LOSSES
The Company did not provide for loan losses by charges to earnings in the
third quarters of 1999 or 1998 because of recoveries during those quarters of
previously charged-off loans amounting to $320,000 and $288,000, respectively.
Such recoveries were credited to the allowance for loan losses in light of the
level of growth of the loan portfolio during those periods of time.
NON-INTEREST INCOME
Gains on sales of marketable equity securities during the three months ended
September 30, 1999 and 1998 were $2.0 million and $426,000, respectively.
Marketable equity securities are held by the Company primarily for capital
appreciation and not for trading purposes. While the Company has enjoyed
attractive returns on its investment in marketable equity securities over a
long-time frame, there can be no assurance that attractive returns will continue
in the future. Fluctuations in the stock market can cause rapid significant
swings in investment returns.
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 decrease in fees and charges from $235,000 in the third quarter of 1998
to $222,000 in the third quarter of 1999 resulted primarily from a $42,000
decline in mortgage loan fees from late charges, prepayments and commitments.
Offsetting part of the decline was a $38,000 increase in deposit service fees
resulting from pricing changes and better account monitoring.
NON-INTEREST EXPENSE
Excluding the $1.6 million and $272,000, respectively, of expenses resulting
from the Company's recognition and retention plan and start-up of an internet
bank subsidiary addressed in earlier sections of this document, total
non-interest expense increased 7.0% from $2.3 million for the third quarter of
1998 to $2.5 million for the third quarter of 1999. The increase was due in part
to higher depreciation expense resulting from upgrades of computer equipment
($19,000) and higher marketing costs ($74,000).
INCOME TAXES
The effective rate of income taxes was 35.2% in the third quarter of 1999 and
35.6% in the third quarter of 1998. 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, 1999
AND 1998
GENERAL
Net income for the nine months ended September 30, 1999 was $15.6 million
($0.55 per share) compared to $14.0 million (per share data not applicable since
the Company converted to stock on March 24, 1998). The 1999 period included $5.6
million of gains from sales of marketable equity securities ($3.4 million on an
after-tax basis, or $0.12 per share) compared to $1.7 million ($1.0 million on
an after-tax basis) in the 1998 period. The 1999 period also included a gain on
the sale of a foreclosed property of $615,000 ($399,000 on an after-tax basis)
and expenses of $2.9 million ($1.9 million on an after-tax basis, or $0.07 per
share) related to the recognition and retention plan approved by the
stockholders on April 15, 1999 and $272,000 ($179,000 on an after-tax basis)
related to the start-up of the new internet bank subsidiary. Additionally, the
nine month periods include receipt of $224,000 ($145,000 on an after-tax basis)
in 1999 and $444,000 ($287,000 on an after-tax basis) in 1998 of interest income
on problem loans earned in prior periods. Excluding these particular items of
income and expense,
17
net income was $13.8 million ($0.49 per share) in the 1999 period, or 8.3%
higher than the $12.7 million in the 1998 period.
Interest rate spread declined from 2.83% in the 1998 period to 2.65% in the
1999 period. The average yield on assets declined from 7.53% in the 1998 period
to 7.20% in the 1999 period primarily because of lower yields on existing loans,
loan originations, short-term investments and newly acquired investment
securities caused by a falling interest rate environment. In addition, average
deposit balances of $44.0 million were held by the Company during the first
quarter of 1998 in connection with subscriptions for stock in the Offering. The
rate paid on such funds was 2.50% while the average rate earned from investing
the funds in short-term investments during the same period was 5.41%. The
average rate paid on deposits, borrowed funds and the stock subscription
proceeds was 4.70% in the first nine months of 1998 compared to an average rate
of 4.55% paid on deposits and borrowed funds in the first nine months of 1999.
Excluding the funds from stock subscriptions, the average rate paid on deposits
and borrowed funds in the first nine months of 1998 would have been 4.76%, or 6
basis points higher than the actual rate paid.
INTEREST INCOME
The average balance of interest-earning assets increased by $92.4 million, or
11.5%, from $803.1 million in the 1998 nine month period to $895.5 million in
the 1999 nine month period. Loans (excluding money market loan participations)
accounted for 61.2% of total interest-earning assets in the 1998 period compared
to 65.2% in the 1999 period. The increase was attributable to the same reason
cited in the section of this filing comparing third quarter 1999 operating
results to third quarter 1998 operating results.
Interest income on loans, excluding money market loan participations and the
$224,000 (in 1999) and $444,000 (in 1998) of interest earned in prior periods
referred to in the preceding section, was $35.6 million in the 1999 period
compared to $32.2 million in the 1998 period, an increase of $3.4 million, or
10.6%. The additional income resulting from an increase in average loans
outstanding of $92.7 million, or 18.9%, in the 1999 period compared to the 1998
period was partially offset by a decline in the average rate earned on loans
from 8.73% in the 1998 period to 8.13% in the 1999 period. The reduction in loan
yield was attributable to a falling interest rate environment.
The average balances invested in money market loan participations during the
nine months ended September 30, 1999 and 1998 were $35.2 million and $38.8
million, respectively, and the yields earned on those balances were 5.13% and
5.72%, respectively.
Interest income on short-term investments decreased 71.7% from $1.8 million
in the 1998 period to $495,000 in the 1999 period as a result of substantially
reduced average balances in such investments ($42.4 million in the 1998 period
compared to $13.6 million in the 1999 period) and a reduction in yields from
5.51% in the 1998 period to 4.84% in the 1999 period. Interest income on debt
securities increased 10.5% from $8.8 million in the 1998 period to $9.7 million
in the 1999 period. The average balances invested in debt securities increased
13.5% from $197.4 million to $224.1 million and the yields earned on such
securities were 5.95% and 5.80% in the comparable periods.
INTEREST EXPENSE
Excluding the average balance of deposits associated with the Offering of
$14.7 million in the first nine months of 1998, the average balance of all other
deposits increased by $23.6 million, or 5.1%, from $464.5 million in the 1998
period to $488.0 million in the 1999 period. The average rates paid on deposits
(excluding those associated with the Offering) were 4.50% in the 1998 period and
4.23% in the 1999 period. Most of the growth in deposits was in money market
savings accounts.
The Company increased its use of borrowings from the FHLB as part of its
management of interest rate risk. The average balances of advances outstanding
were $106.1 million in the first nine months of 1999 compared to $72.3 million
in the first nine months of 1998 and the average rates paid on such balances
were 6.05% and 6.41%, respectively.
18
PROVISION FOR LOAN LOSSES
The Company provided $300,000 for loan losses in the first nine months of
1999 compared to $100,000 in the first nine months of 1998. The provisions were
made in light of the level of growth of the loan portfolio during those periods
of time. Also taken into consideration in arriving at these amounts were
recoveries during those nine month periods of $320,000 and $289,000,
respectively, of loans charged off in prior years. Such amounts were credited to
the allowance for loan losses.
NON-INTEREST INCOME
Gains on sales of marketable equity securities in the 1999 and 1998 nine
month periods were $5.6 million and $1.7 million, respectively. The 1999 period
also includes a gain of $615,000 resulting from the sale of a foreclosed
property. The decrease in fees and charges from $822,000 in the 1998 period to
$661,000 in the 1999 period resulted primarily from a $188,000 decline in
mortgage loan fees from late charges, prepayments and commitments. Offsetting
part of the decline was a $56,000 increase in deposit service fees resulting
from pricing changes and better account monitoring.
NON-INTEREST EXPENSE
Excluding the $2.9 million and $272,000, respectively, of expenses resulting
from the Company's recognition and retention plan and start-up of an internet
bank subsidiary addressed in earlier sections of this document, total
non-interest expense increased 8.6% from $6.8 million in the 1998 nine month
period to $7.3 million in the 1999 nine month period. Most of the increase
resulted from higher compensation and employee benefits expense caused by
additional personnel relating primarily to lending activities and a larger
provision for the Company's employee stock ownership plan ("ESOP"). The ESOP,
which went into effect in the second quarter of 1998, resulted in expense of
$270,000 in the 1999 period compared to $203,000 in the 1998 period. Also
contributing to the higher level of expense in 1999 were increased costs
attributable to being a public company, increased depreciation expense resulting
from upgrades of computer equipment and increased marketing costs. Offsetting
some of these increases was a reduction in Year 2000 compliance costs from
$85,000 in the 1998 period to $9,000 in the 1999 period.
INCOME TAXES
The effective rate of income taxes was 35.5% in the 1999 period compared to
36.1% in the 1998 period. Both periods benefitted from low state income taxes
resulting from the existence of a real estate investment subsidiary and
utilization of investment security subsidiaries.
PROJECTED IMPACT OF NEW INTERNET BANK SUBSIDIARY (LIGHTHOUSE BANK) AND
RECOGNITION AND RETENTION PLAN ON FUTURE OPERATING RESULTS
On July 15, 1999, the Company announced its intention to establish a new
internet bank subsidiary to be called Lighthouse Bank. An application has been
filed requesting regulatory approval to commence operations in the first few
months of next year. Establishment of this new subsidiary is viewed as a
strategic initiative that should provide a meaningful way to leverage part of
the capital that was raised in the Offering in March 1998.
While it is expected that Lighthouse Bank will make a long-term contribution
to the successful performance of the Company, it will likely incur operating
losses in the next two years. On an after-tax basis, expenses relating to the
start-up of Lighthouse Bank should be in the range of $250,000 to $350,000 in
the fourth quarter of 1999. After-tax operating losses of Lighthouse Bank,
including foregone income on the Company's contemplated $25 million capital
contribution into Lighthouse Bank, could be in the range of $2.7 million to $3.2
million in 2000 and $2.0 million to $2.5 million in 2001. These estimates of
future operating results constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and are subject
to risks and uncertainties that could cause actual results to differ materially.
Factors that might cause such a difference include, but are not limited to,
general economic conditions, changes in interest rates, regulatory
considerations, competition, technological developments, recruitment of
qualified personnel and market acceptance of Lighthouse Bank's pricing, products
and services.
19
Recognition and retention plan expense on an after-tax basis will be
approximately $2.4 million in 1999 (of which approximately $450,000 is expected
to be incurred in the fourth quarter), $800,000 in 2000 and $110,000 in 2001.
These expenses, coupled with the estimated losses of Lighthouse Bank, will have
a negative effect on future consolidated earnings of the Company. The negative
effect of these items on the second and third quarter of 1999 has effectively
been offset by gains resulting from sales of securities. Continued realization
of securities gains in the future is highly dependent on factors outside the
control of the Company and, accordingly, cannot be assured.
ASSET/LIABILITY MANAGEMENT
The Bank'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 Bank's
operating results, the Bank's interest rate risk position and the effect changes
in interest rates would have on the Bank's net interest income.
Generally, it is the Bank'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 Bank. At
September 30, 1999, interest-earning assets maturing or repricing within one
year amounted to $381.1 million and interest-bearing liabilities maturing or
repricing within one year amounted to $455.0 million resulting in a cumulative
one-year negative gap position of $73.9 million, or 8.1% 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. In March
1998, $134.8 million of net proceeds from the Offering added significantly to
the funds available to the Company for use in conducting its business. While
maturities and scheduled amortization of loans and investments are predictable
sources of funds, deposit flows and mortgage loan prepayments are greatly
influenced by interest rate trends, economic conditions and competition.
During the past few years, the combination of generally low interest rates
on deposit products and the attraction of alternative investments such as mutual
funds and annuities has resulted in little growth or a net decline in deposits
in certain time periods. Based on its monitoring of historic deposit trends and
its current pricing strategy for deposits, management believes the Company will
retain a large portion of its existing deposit base.
From time to time, the Company utilizes advances from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. During the nine months ended September 30, 1999, the Company
repaid advances of $15.6 million and obtained new advances of $32.5 million.
Total advances outstanding at September 30, 1999 amounted to $111.3 million.
The Company's most liquid assets are cash and due from banks, short-term
investments, debt securities and money market loan participations that generally
mature within 90 days. At September 30, 1999, such assets amounted to $58.8
million, or 6.5% of total assets.
At September 30, 1999, the Company and the Bank exceeded all regulatory
capital requirements. The Bank's leverage capital was $203.3 million, or 24.3%
of adjusted assets. The minimum required leverage capital ratio is 3.00% to
5.00% depending on a bank's supervisory rating.
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YEAR 2000 ("Y2K") COMPLIANCE
Changing from the year 1999 to 2000 has the potential to cause problems in
data processing and other date- sensitive systems, a problem known as the Year
2000 or Y2K dilemma. The Year 2000 date change can affect any system that uses
computer software programs or computer chips, including automated equipment and
machinery. For example, many software programs or computer chips store calendar
dates as two-digit rather than four-digit numbers. These software programs
record the year 1998 as "98." This approach will work until the Year 2000 when
"00" may be read as 1900 instead of 2000.
Regarding the Company, computer systems are used to perform financial
calculations, track deposits and loan payments, transfer funds and make direct
deposits. The processing of the Company's loan and deposit transactions is
outsourced to a third-party data processing vendor. Computer software and
computer chips also are used to run security systems, communications networks
and other essential bank equipment. Because of its reliance on these systems
(including those used by its third-party data processing vendor), the Company is
following a comprehensive process to assure that such systems are ready for the
Year 2000 date change.
To become Y2K compliant, the Company is following a five-step process
suggested by federal bank regulatory agencies. A description of each of the
steps and the status of the Company's efforts in completing the steps is as
follows:
Step 1. AWARENESS AND UNDERSTANDING OF THE PROBLEM. The Company has formed
a Year 2000 team that has investigated the problem and its potential impact on
the Company's systems. An independent consulting firm was engaged to assist the
Company in development of its approach to becoming Y2K compliant. This phase
also includes education of the Company's employees and customers about Y2K
issues. The awareness and understanding phase of this step has been completed.
Training and communication has taken place and continues in 1999.
Step 2. IDENTIFICATION OF ALL POTENTIALLY AFFECTED SYSTEMS. This step has
included a review of all major information technology ("IT") and non-information
technology ("non-IT") systems to determine how they are impacted by Y2K issues.
An inventory has been prepared of all vendors who render IT and non-IT services
to the Company. This step is considered complete. New hardware or software
purchased during 1999 is evaluated for Y2K compliance.
Step 3. ASSESSMENT AND PLANNING. The Y2000 team has completed its
assessment of which systems and equipment are most prone to placing the Company
at risk if they are not Y2K compliant. The project team has developed an
inventory of its vendors, an inventory of actions to be taken, identification of
the team members responsible for completion of each action, a completion
timetable and a project tracking methodology. Significant vendors have been
requested to advise the Company in writing of their Y2K readiness, including
actions to become compliant if they are not already compliant. A plan has been
developed to repair or replace systems and equipment not currently Y2K
compliant. This step is considered complete.
Step 4. CORRECTION AND TESTING. The Company's third party data processing
servicer as well as vendors who provide significant technology-related services
have modified their systems to become Y2K compliant. The Company has developed
scripts involving typical transactions to test the proper functioning of the
modified systems. It has also arranged for repair or replacement of equipment
programs affected by Y2K issues. All of the testing and corrections are
complete. The monitoring of certain third party vendors will continue throughout
1999.
Step 5. IMPLEMENTATION. This step includes repair or replacement of systems
and computer equipment and the development of contingency plans. The repair and
replacement phase as well as the development of contingency plans for how the
Company would resume business if unanticipated problems arise from
non-performance by IT and non-IT vendors have been completed. Training of
employees and testing of the contingency plans have taken place.
The Company's efforts to become Y2K compliant are being monitored by its
federal banking regulators. Failure to be Y2K compliant could subject the
Company to formal supervisory or enforcement actions.
21
The Company expensed $130,000 in 1998, $85,000 of which was in the first
nine months of the year. The Company expensed $9,000 in the first nine months of
1999. While the Company expects to incur additional costs through 1999 to become
Y2K compliant, it does not expect such costs to be material to the operating
expenses of the Company. The Company presently believes the Y2K issue will not
pose significant operating problems for the Company. However, if implementation
plans are not completed in a satisfactory and timely manner, in particular by
third parties on whom the Company is dependent, or other unforeseen problems
arise, the Y2K issue could have a material adverse effect on the operations of
the Company.
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 ended December 31, 1998.
For quantitative information about market risk, see pages 12 through 14 of
the Company's 1998 Annual Report.
There have been no material changes in the quantitative disclosures about
market risk as of June 30, 1999 from those presented in the Company's 1998
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
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
All required exhibits are included in Part I under Financial Statements
(Unaudited) and Management's Discussion and Analysis of Operations, and are
incorporated by reference, herein.
There were no reports filed on Form 8-K.
22
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 5, 1999 By: /s/ Richard P. Chapman Jr.
----------------------------------
Richard P. Chapman, Jr.
President and Chief Executive Officer
Date: November 5, 1999 By: /s/ Paul R. Bechet
---------------------------------------
Paul R. Bechet
Senior Vice President and Chief
Financial Officer
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