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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 1998
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 incorporation of organization) (I.R.S. Employer 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)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, par value of $.01 per share
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
The number of shares of common stock held by nonaffiliates of the
registrant as of March 23, 1999 was 12,808,913 for an aggregate market value of
$142,499,158. This excludes 15,420,350 shares held by Brookline Bancorp, MHC and
381,237 shares held by Brookline Savings Bank Employee Stock Ownership Plan and
Trust.
At March 23, 1999, the number of shares of common stock, par value $.01 per
share, issued and outstanding were 29,095,000 and 28,610,500, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of the Annual Report to Stockholders for the year ended December
31, 1998 (Part II and Part III)
2. Proxy Statement for 1999 Annual Meeting of Stockholders (Part III)
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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-K
Index
Part I Page
Item 1. Business 1
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission Of Matters To A Vote Of Security Holders 20
Part II
Item 5. Market For The Registrant's Common Stock And
Related Security Holder Matters 21
Item 6. Selected Consolidated Financial Data 21
Item 7. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations 21
Item 7a. Quantitative And Qualitative Disclosures About Market Risk 21
Item 8. Financial Statements And Supplementary Data 21
Item 9. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosures 21
Part III
Item 10. Directors and Executive Officers Of The Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership Of Certain Beneficial Owners
And Management 22
Item 13. Certain Relationships And Related Transactions 22
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 22
Signatures 24
PART I
Item 1. Business
General
Brookline Bancorp, Inc. (the "Company") is a bank holding company
incorporated in Massachusetts that 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. The Bank is a Massachusetts savings
bank established in 1871.
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 and liabilities.
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. The net proceeds of the Offering were $134.8 million.
The Company contributed 50% of the net proceeds to the Bank for general
corporate use and retained the other 50%. The Company used the net proceeds it
retained to fund a loan to the Bank's employee stock ownership plan, acquire
investment securities and repurchase shares of the Company's common stock in the
open market.
Market Area and Credit Risk Concentration
The Bank operates five full-service banking offices in the Town
of Brookline, an urban/suburban community adjacent to the City of Boston, and a
loan production office in Worcester, Massachusetts opened in July 1998.
Worcester is the second largest city in New England. The Bank's deposits are
gathered from the general public primarily in the Town of Brookline and
surrounding communities. The Bank's lending activities are concentrated
primarily in the greater Boston metropolitan area and eastern Massachusetts. The
opening of the Worcester office has expanded the Bank's lending activities in
central Massachusetts. The greater Boston metropolitan area benefits from the
presence of numerous institutions of higher learning, medical care and research
centers and the corporate headquarters of several significant mutual fund
investment companies. Eastern Massachusetts also has many high technology
companies employing personnel with specialized skills. These factors affect the
demand for residential homes, multi-family apartments, office buildings,
shopping centers, industrial warehouses and other commercial properties.
The Bank's urban and suburban market area is characterized by a
large number of apartment buildings, condominiums and office buildings. As a
result, for many years, the Bank has emphasized multi-family and commercial real
estate mortgage lending. These types of loans typically generate higher yields,
but also involve greater credit risk than one-to four-family mortgage loans.
Many of the Bank's borrowers have more than one muti- family or commercial real
estate loan outstanding with the Bank. Moreover, the loans are concentrated in
the market area described in the preceding paragraph.
Economic Conditions and Governmental Policies
The earnings and business of the Company are affected by external
influences such as general economic conditions and the policies of governmental
authorities, including the Federal Reserve Board. The Federal Reserve Board
regulates the supply of money and bank credit to influence general economic
conditions throughout the
1
United States. The instruments of monetary policy employed by the Federal
Reserve Board affect interest rates earned on investment securities and loans
and interest rates paid on deposits and borrowed funds.
Repayment of loans made by the Bank, in particular multi-family
and commercial real estate loans, generally is dependent on sufficient income
from the properties to cover operating expenses and debt service. Accordingly,
the asset quality of the Bank's loan portfolio is greatly affected by the
economy in the Bank's market area. During the past few years, the Massachusetts
economy has been strong and interest rates have been declining. While these
conditions, for the most part, have had a favorable impact on property values
and the business of the Bank and its borrowers, declining interest rates have
prompted many borrowers to refinance existing loans and seek new loans at lower
interest rates fixed for longer periods of time. Besides causing pressure on the
Bank's interest rate margin, the low interest rate environment has resulted in
minimal deposit growth as customers have found other investment instruments more
attractive. During the late 1980s and early 1990s, a regional recession and a
higher interest rate environment caused a significant decline in employment and
in real estate values, ultimately resulting in the failure of many financial
institutions in Massachusetts and New England.
Competition
The Bank faces significant competition both in making loans and
in attracting deposits. The Boston metropolitan area has a high density of
financial institutions, many of which are branches of significantly larger
institutions which have greater financial resources than the Bank, and all of
which are competitors of the Bank to varying degrees. The Bank's competition for
loans comes principally from commercial banks, savings banks, savings and loan
associations, mortgage banking companies, credit unions, insurance companies and
other financial service companies. Its most direct competition for deposits has
historically come from commercial banks, savings banks, savings and loan
associations and credit unions. The Bank faces additional competition for
deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions.
Supervision and Regulation
General
The Company and the Bank are subject to extensive regulation
under federal and state banking laws and regulations. Both must obtain
regulatory approvals prior to entering into certain transactions including, but
not limited to, mergers with and acquisitions of other financial institutions.
The following discussion of certain of the material elements of the regulatory
framework applicable to banks and bank holding companies is not intended to be
complete and is qualified in its entirety by the text of the relevant federal
and state statutes and regulations. Changes in applicable laws and regulations
could have a material effect on the business of the Company and the Bank.
As a bank holding company, the Company is subject to
comprehensive regulation and examination by the Board of Governors of the
Federal Reserve System (the "FRB") under the Bank Holding Company Act of 1956,
as amended (the "BHC Act"). The Company is required to file reports with the FRB
concerning its activities and financial condition. As a Massachusetts
corporation, the Company is also subject to regulation by the Massachusetts
Division of Banks (the "Division").
The Bank is subject to extensive regulation and examination by
the Division, as its chartering agency, and the Federal Deposit Insurance
Corporation (the "FDIC"), as its insurer of deposits to the extent permitted by
law. The Bank is required to file reports with, and is examined periodically by,
the Division and the FDIC concerning its activities and financial condition. The
Bank is also a member of the Federal Home Loan Bank of Boston (the "FHLB").
2
Bank Holding Company Regulation
General. The FRB has extensive enforcement authority over bank
holding companies, including, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to require that
a holding company divest subsidiaries (including its bank subsidiaries). In
general, enforcement actions may be initiated for violations of law and
regulations and unsafe or unsound practices against the company, its
subsidiaries, and officers, directors and other institution-affiliated parties.
The Company must obtain the approval of the FRB and the
Massachusetts Board of Bank Incorporation before (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares (unless it already owns or controls the majority of such shares),
(ii) acquiring all or substantially all of the assets of another bank or bank
holding company or (iii) merging or consolidating with another bank holding
company.
Bank holding companies are generally prohibited from engaging in
non-banking activities, subject to certain exceptions. As a bank holding
company, the Company's activities are limited generally to the business of
banking and activities determined by the FRB to be so closely related to banking
as to be a proper incident thereto. The Company cannot engage, directly,
indirectly or in any manner, in any real estate investment or development
activities without the prior approval of the FRB.
Interstate Banking and Branching. Federal law permits adequately
capitalized and managed bank holding companies to acquire control of banks in
any state subject to certain deposit and other limitations. Further, banks in
Massachusetts are allowed by federal and state law to establish and maintain
branches through a merger or consolidation with or by the purchase of the whole
or any part of the assets or stock of any out-of-state bank or through de novo
branch establishment in any state other than Massachusetts. Since the
Massachusetts law is reciprocal, financial institutions in states with
reciprocity arrangements could enter Massachusetts through acquisition of or
merger with a Massachusetts financial institution or through establishment of
branches.
Transactions with Affiliates. The Bank and its subsidiaries are
subject to a number of regulatory restrictions, including certain restrictions
regarding (i) extensions of credit to the Company and the Company's nonbanking
affiliates (collectively with the Company, the "Affiliates"); (ii) the purchases
of assets from Affiliates; (iii) the issuance of a guarantee or acceptance of a
letter of credit on behalf of Affiliates; and (iv) investments in stock or other
securities issued by Affiliates or acceptance thereof as collateral for an
extension of credit. Further, all transactions among the Company and its direct
and indirect subsidiaries must be made on an arm's length basis and fair market
terms.
Massachusetts Bank Regulation
General. As a Massachusetts-chartered savings bank, the Bank is
subject to supervision, regulation and examination by the Division and to
various Massachusetts statutes and regulations which govern, among other things,
investment powers, lending and deposit-taking activities, borrowings,
maintenance of surplus and reserve accounts, distribution of earnings and
payment of dividends. In addition, the Bank is subject to Massachusetts consumer
protection and civil rights laws and regulations. The Division's approval is
required for a Massachusetts bank to establish or close branches, merge with
other banks, organize a holding company, issue stock and undertake certain other
activities.
Any Massachusetts bank that does not operate in accordance with
the regulations, policies and directives of the Massachusetts Commissioner of
Banks (the "Commissioner") may be subject to sanctions for non-compliance
including, among other things, suspension or revocation of its charter. The
Commissioner may, under certain circumstances, suspend or remove officers or
directors who have violated the law, conducted the Bank's business in a manner
unsafe, unsound or contrary to depositors' interests, or been negligent in the
performance of their duties.
3
Bank Powers and Investment Activities. Generally, Massachusetts
banks have powers equivalent to those of national banks. In addition, the Bank
may invest in preferred and common stock of any corporation provided such
investments do not involve control of any corporation and do not, in the
aggregate, exceed 4% of the Bank's deposits. Subject to certain limits, the Bank
may also invest in investments not otherwise legally permitted.
Depositors Insurance Fund. All Massachusetts-chartered savings
banks are required to be members of the Depositors Insurance Fund (the "DIF"), a
corporation that insures savings bank deposits not covered by federal deposit
insurance. The DIF is authorized to charge savings banks an annual assessment of
up to 1/16th of 1% of a savings bank's deposits insured by the DIF.
Federal Deposit Insurance Corporation
The FDIC insures the Bank's deposit accounts to the $100,000
maximum per separately insured account. The Bank is subject to regulation,
examination and supervision by and the reporting requirements of the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") made extensive changes to the federal banking law. Among other
things, FDICIA requires federal bank regulatory agencies to take prompt
corrective action to address the problems of under-capitalized banks. FDICIA
also amended statutes governing extensions of credit to directors, executive
officers and principal stockholders of banks and their holding companies.
Prompt Corrective Action
The federal banking agencies have promulgated regulations to
implement the system of prompt corrective action required by federal law. Under
the regulations, a bank shall be deemed to be (i) "well capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
"Undercapitalized" banks are subject to growth, capital
distribution (including dividend) and other limitations and are required to
submit a capital restoration plan. A bank's compliance with such plan is
required to be guaranteed by any company that controls the undercapitalized
institution. If an "undercapitalized" bank fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks are subject to one or more of a number of additional
restrictions, including an order by the FDIC to sell sufficient voting stock to
become adequately capitalized, requirements to reduce total assets and cease
receipt of deposits from correspondent banks or to dismiss directors or
officers, and restrictions on interest rates paid on deposits, compensation of
executive officers and capital distributions by a parent holding company.
Based on the foregoing, the Company is currently classified as
"well capitalized".
4
Standards for Safety and Soundness
The federal agencies have adopted Interagency Guidelines
Prescribing Standards for Safety and Soundness ("Guidelines"). The Guidelines
set forth standards for use by federal banking agencies to identify and address
problems at insured depository institutions before capital becomes impaired. The
standards address internal controls and information systems, internal audit
program, credit underwriting, loan documentation, interest rate risk exposure,
asset growth, and compensation, fees and benefits. The standards also require
institutions to examine asset quality and earnings standards. If a federal
banking agency determines that an institution fails to meet any of the
prescribed standards, the agency may require the institution to submit to the
agency an acceptable plan to achieve compliance with the standards.
Limitations on Dividends and Other Capital Transactions
The FRB has issued a policy statement expressing their view that
a bank holding company should pay cash dividends only to the extent that its net
income for the past year is sufficient to cover both the cash dividends and a
rate of earnings retention that is consistent with the holding company's capital
needs, asset quality and overall financial condition. The FRB may prohibit a
bank holding company from paying any dividends if its bank subsidiary is
classified as "undercapitalized."
The FRB has imposed certain restrictions regarding the waiving of
dividend payments by the Company to its mutual holding company parent. To date,
the mutual holding company has not waived any dividends paid by the Company. If,
in the future, the mutual holding company sought to waive dividends paid by the
Company and obtained the approval of the FRB to do so, the cumulative amount of
waived dividends would not be available for payment by the Company to minority
stockholders and would be maintained in a restricted capital account. While such
account would not have to be reflected in the Company's financial statements, it
would not be available for distribution to minority stockholders if the mutual
holding company parent decided to convert to stock form in the future.
The FDIC has the authority to use its enforcement powers to
prohibit a savings bank from paying dividends if, in its opinion, the payment of
dividends would constitute an unsafe and unsound practice. Federal law also
prohibits the payment of dividends by a bank that will result in the bank
failing to meet its applicable capital requirements. Massachusetts law also
restricts the Bank from declaring a dividend that would reduce its capital below
(i) the amount required to be maintained by state and federal law and
regulations or (ii) the amount of the Bank's liquidation account established in
connection with the Bank's reorganization.
Under the Division's regulations, the Company is prohibited from
repurchasing any shares of its stock within three years of its date of issuance
unless the repurchase is limited to stock repurchases of no greater than 5% of
the Company's stock where compelling and valid business reasons are established
to the satisfaction of the Commissioner. On October 20, 1998, the Company
received the approval of the Commissioner to repurchase up to 5% of its
outstanding common stock, or 1,454,750 shares. There is no time limit by which
the Company must repurchase the shares.
Community Reinvestment Act
Under the Community Reinvestment Act (the "CRA") and a
Massachusetts statutory counterpart, the Bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The Bank is subject to examination by the FDIC and the Division
regarding its compliance with CRA requirements. The Bank's latest ratings from
examinations conducted by the FDIC and the Division were "satisfactory."
5
Financial Modernization
Various federal legislative proposals are pending to "modernize"
the nation's financial system. Although the proposals vary, most generally would
expand the powers of financial institutions by permitting a combination of
banking and commercial functions.
Federal Securities Law
The common stock of the Company is registered with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act"). The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act. The Company is also required to file annual, quarterly and
periodic reports with the SEC.
Federal Home Loan Bank System
The Federal Home Loan Bank system functions as a reserve credit
source for its member financial institutions and is subject to the regulation
and oversight of the Federal Housing Finance Board. The Bank is a voluntary
member of the Federal Home Loan Bank of Boston ("FHLB"). As a member, the Bank
is required to own FHLB capital stock that is directly proportionate to its home
mortgage loans and borrowings from the FHLB. All borrowings from the FHLB are
required to be fully secured by sufficient collateral as determined by the FHLB.
Investment Securities
The investment policy of the Company is reviewed and approved by
the Board of Directors on an annual basis. The Company's investment portfolio is
structured so as to provide asset diversification, interest and dividend income,
a source of liquidity to meet loan demand and potential deposit outflows, and
the opportunity to achieve capital appreciation through long-term investment in
equity securities.
The Bank's current policy generally favors investment in U.S.
Government and Agency securities, corporate debt obligations and corporate
equities. The policy permits investment in mortgage-backed and mortgage-related
securities and allows the use of interest rate swaps, options and futures, but
only for purposes of hedging the interest or credit risk of specific Company
assets. While the Company has seldom used hedging instruments, at December 31,
1998, it was a party to a $5.0 million interest-rate swap agreement that matures
April 14, 2005. The Company entered into the agreement to match more closely the
repricing of certain assets and liabilities and to reduce its exposure to
increases in interest rates.
For the past few years, the Company's investment strategy has
emphasized the purchase of U.S. Government and Agency obligations and corporate
debt obligations generally maturing within two years. The Company's investment
policy generally requires that corporate obligations be rated "A" or better at
the time of acquisition. In certain instances, corporate obligations rated "BBB"
can be purchased. At December 31, 1998, only $2.0 million of the Company's debt
securities were rated "BBB" or "Baa".
At December 31, 1998, the Company's marketable equity securities
portfolio totaled $30.6 million, including net unrealized gains of $22.7
million. Most of the portfolio was comprised of the stocks of national and
regional money center banks, Freddie Mac and utility companies. The Company's
policy limits the aggregate carrying value of marketable equity securities to no
more than 25% of the Company's stockholder's equity, excluding net unrealized
gains on securities available for sale. The Company purchases marketable equity
securities as long-term investments that can provide the opportunity for capital
appreciation and dividend income that is taxed on a more favorable basis than
operating income. There can be no assurances that investment in marketable
equity securities will achieve appreciation in value and, therefore, such
investments involve higher risk.
6
In the latter part of 1998, the Company commenced purchasing
collateralized mortgage obligations with expected maturities in the two-to-four
year range. These securities were purchased for their yield which compared
favorably to yields on other debt instruments available for comparable periods
of time.
The following table sets forth the composition of the Company's debt
and equity securities portfolios at the dates indicated:
At December 31,
----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Percent Percent Percent
Amount of total Amount of total Amount of total
-------- -------- ------- -------- -------- --------
(Dollars in thousands)
Debt securities:
U.S. Government and Agency obligations... $ 92,824 35.69% $82,319 44.07% $ 70,055 43.12%
Corporate obligations.................... 124,609 47.91 71,480 38.26 65,808 40.50
Collateralized mortgage obligations
and mortgage-backed securities........ 6,891 2.65 1,265 0.68 2,764 1.70
-------- ------- ------- ------ -------- -------
Total debt securities.................. 224,324 86.25 155,064 83.01 138,627 85.32
Marketable equity securities................ 30,595 11.76 28,017 15.00 20,365 12.54
Restricted equity securities................ 5,174 1.99 3,721 1.99 3,481 2.14
-------- ------- ------- ------ -------- -------
Total securities....................... $260,093 100.00% $186,802 100.00% $162,473 100.00%
======== ======= ======== ====== ======== =====
Debt and equity securities available for sale $133,529 51.34% $117,637 62.98% $117,372 72.24%
Debt securities held to maturity............ 121,390 46.67 65,444 35.03 41,620 25.62
Restricted equity securities................ 5,174 1.99 3,721 1.99 3,481 2.14
-------- ------- ------- ------ -------- -------
Total securities....................... $260,093 100.00% $186,802 100.00% $162,473 100.00%
======== ======= ======== ====== ======== =======
The increase in the investment portfolio from $186.8 million at the
end of 1997 to $260.1 million at the end of 1998 resulted from placement of a
significant amount of the net proceeds from the Offering in debt securities.
Over time, the Company expects to reduce the percentage of its assets in debt
securities as growth takes place in the loan portfolio.
7
The following table sets forth certain information regarding the
amortized cost and market values of the Company's investment securities at the
dates indicated:
At December 31,
--------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- --------------------
Amortized Market Amortized Market Amortized Market
cost value cost value cost value
------- -------- ------- -------- -------- --------
(Dollars in thousands)
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations... $ 88,186 $ 88,810 $ 74,088 $ 74,287 $ 57,089 $ 57,104
Corporate obligations.................... 8,218 8,183 15,341 15,333 39,890 39,903
Collateralized mortgage obligations...... 5,982 5,941 - - - -
-------- -------- -------- -------- -------- --------
Total debt securities.................. 102,386 102,934 89,429 89,620 96,979 97,007
Marketable equity securities................ 7,939 30,595 6,168 28,017 6,703 20,365
-------- -------- -------- -------- -------- --------
Total securities available for sale.... 110,325 133,529 95,597 117,637 103,682 117,372
Net unrealized gains on securities
available for sale........................ 23,204 - 22,040 - 13,690 -
-------- -------- -------- -------- -------- --------
Total securities available for sale, net $133,529 $133,529 $117,637 $117,637 $117,372 $117,372
======== ======== ======== ======== ======== ========
Securities held to maturity:
U.S. Government and Agency obligations...... $ 4,014 $ 4,038 $ 8,032 $ 8,032 $ 12,951 $ 12,953
Corporate obligations....................... 116,426 117,012 56,147 56,254 25,905 25,935
Mortgage-backed securities.................. 950 993 1,265 1,314 2,764 2,807
-------- -------- -------- -------- -------- --------
Total securities held to maturity........ $121,390 $122,043 $ 65,444 $ 65,600 $ 41,620 $ 41,695
======== ======== ======== ======== ======== ========
Restricted equity securities:
Federal Home Loan Bank of Boston stock...... $ 4,921 $ 3,468 $ 3,228
Massachusetts Savings Bank Life Insurance
Company stock............................. 253 253 253
-------- -------- --------
Total restricted equity securities....... $ 5,174 $ 3,721 $ 3,481
======== ======== ========
8
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company's
securities portfolio as of December 31, 1998.
At December 31, 1998
-----------------------------------------------------------------
After one year After five years
One year or less through five years through ten years
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
Carrying average Carrying average Carrying average
value yield value yield value yield
------- ------- ------- -------- -------- --------
(Dollars in thousands)
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations......... $47,265 4.84% $ 41,545 4.89% $ - - %
Corporate obligations.......................... 999 6.12 6,665 5.59 - -
Collateralized mortgage obligations............ - - 5,941 5.74 - -
------- -------- ----
Total debt securities........................ 48,264 4.87 54,151 5.07 - -
------- -------- ----
Marketable equity securities(1)...................
Total securities available for sale..........
Securities held to maturity:
U.S. Government and Agency obligations............ 4,014 5.82 - - - -
Corporate obligations............................. 41,903 6.19 74,023 5.73 500 5.82
Mortgage-backed securities........................ - - - - 366 8.22
------- -------- -----
Total securities held to maturity............ 45,917 6.16 74,023 5.73 866 6.83
------- -------- -----
Restricted equity securities:
Federal Home Loan Bank of Boston stock............
Massachusetts Savings Bank Life Insurance
Company stock(1).............................
Total restricted equity securities(1)........
------- -------- ------
Total securities............................. $94,181 5.50% $128,174 5.45% $ 866 6.83%
======= ======== ======
At December 31, 1998
------------------------------------------
After ten years Total
-------------------- --------------------
Weighted Weighted
Carrying average Carrying average
value yield value yield
-------- -------- -------- --------
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations......... $ - - % $ 88,810 4.86%
Corporate obligations.......................... 519 5.59 8,183 5.65
Collateralized mortgage obligations............ - - 5,941 5.74
------ --------
Total debt securities........................ 519 5.59 102,934 4.98
------
Marketable equity securities(1)................... 30,595 2.40
--------
Total securities available for sale.......... 133,529 4.39
--------
Securities held to maturity:
U.S. Government and Agency obligations............ - - 4,014 5.82
Corporate obligations............................. - - 116,426 5.90
Mortgage-backed securities........................ 584 9.16 950 8.80
------ -------
Total securities held to maturity............ 584 9.16 121,390 5.92
------ --------
Restricted equity securities:
Federal Home Loan Bank of Boston stock............ 4,921 6.50
Massachusetts Savings Bank Life Insurance
Company stock(1)............................. 253 4.18
--------
Total restricted equity securities(1)........ 5,174 6.39
------ --------
Total securities............................. $1,103 7.48% $260,093 5.14%
====== ========
- - ------------------
(1) The yields have been calculated on a tax equivalent basis.
9
Loans
The Company's loan portfolio consists primarily of first mortgage
loans secured by multi-family, commercial and one-to-four family residential
real estate properties located in the Company's primary lending area. Another
component of the loan portfolio consists of participations in commercial loans
to national companies and organizations originated and serviced primarily by
money center banks. Generally, the participations mature between one day and
three months and are viewed by the Company as an alternative short-term
investment for liquidity management purposes rather than as traditional
commercial loans. The Company also provides financing for construction and
development projects, commercial lines of credit primarily to condominium
associations, home equity and second mortgage loans and other consumer loans.
The Company relies on community contacts as well as referrals from
existing customers, attorneys and other real estate professionals to generate
business within its lending area. In addition, existing borrowers are an
important source of business since many of its multi-family and commercial real
estate customers have more than one loan outstanding with the Company. A
commissioned loan originator on the staff of the Company is also used to
generate residential mortgage loan business. The Company's ability to originate
loans depends on the strength of the economy, trends in interest rates, customer
demands and competition.
Multi-family and commercial real estate mortgage lending are the
Company's most significant areas of lending activities. At December 31, 1998 and
1997, such loans represented 79.9% and 76.4 %, respectively, of gross loans,
exclusive of money market loan participations. The Company intends to continue
to emphasize these types of loans depending on the demand for such loans and
trends in the real estate market and the economy.
The Company has written underwriting policies to control the inherent
risks in origination of loans. The policies address approval limits,
loan-to-value ratios, appraisal requirements, debt service coverage ratios, loan
concentration limits and other matters relevant to loan underwriting.
A number of factors are considered in originating multi-family and
commercial real estate mortgage loans. The qualifications and financial
condition of the borrower (including credit history), profitability and
expertise, as well as the value and condition of the underlying property, are
evaluated. When evaluating the qualifications of the borrower, the Company
considers the financial resources of the borrower, the borrower's experience in
owning or managing similar property and the borrower's payment history with the
Company and other financial institutions. Factors considered in evaluating the
underlying property include the net operating income of the mortgaged premises
before debt service and depreciation, the debt service coverage ratio (the ratio
of net operating income to debt service) and the ratio of the loan amount to the
appraised value.
Frequently, multi-family and commercial real estate mortgage loans are
made for five to ten year terms, with an amortization period of twenty to
twenty-five years, and are priced on an adjustable-rate basis with the
borrower's option to fix the interest rate for the first few years. At the
borrower's option, at the time of origination or later during the term, the loan
may be converted to a fixed rate, provided the fixed-rate period selected by the
borrower does not exceed the original term of the loan. When fixed-rate loans
are prepaid, in addition to collecting a normal fee, a "yield maintenance" fee
is also collected when loans are paid prior to the maturity of their fixed-rate
period.
During the past two years, and in particular the second half of
1998, a stable and then declining interest rate environment prompted many
multi-family and commercial real estate borrowers to exercise their options to
convert their adjustable-rate loans to a fixed-rate basis for several years.
Additionally, many new loans were priced at inception on a fixed-rate basis
generally for periods ranging from two to seven years. If interest rates
increase during the fixed-rate phase of these loans, net interest income
relating to these loans would be negatively affected. Occasionally, the Company
has partially funded loans originated on or converted to a fixed-rate basis by
borrowing funds from the FHLB on a fixed-rate basis for periods that approximate
the fixed-rate terms of the loans.
The Company offers both fixed-rate and adjustable-rate mortgage loans
secured by one-to-four family residences. Fixed-rate residential mortgage loans
are not maintained in the Company's loan portfolio.
10
The following table sets forth the comparison of the Company's loan
portfolio in dollar amounts and in percentages by type of loan at the dates
indicated.
At December 31,
----------------------------------------------------------------------------
1998 1997 1996
----------------------- ---------------------- -----------------------
Percent Percent Percent
Amount of total Amount of total Amount of total
--------- --------- ------- --------- -------- ---------
(Dollars in thousands)
Mortgage loans:
One-to-four family............. $ 64,467 11.19% $ 68,907 14.25% $ 57,725 13.08%
Multi-family................... 262,678 45.58 219,909 45.50 200,368 45.40
Commercial real estate......... 197,593 34.29 149,540 30.94 139,430 31.60
Construction and development... 17,255 2.99 13,382 2.77 7,261 1.65
Home equity.................... 5,505 .96 5,276 1.09 6,398 1.45
Second......................... 13,944 2.42 15,855 3.28 19,872 4.50
--------- ------ --------- ------- --------- ------
Total mortgage loans......... 561,442 97.43 472,869 97.83 431,054 97.68
Commercial loans................. 13,051 2.26 9,074 1.88 9,221 2.09
Consumer loans................... 1,775 0.31 1,393 0.29 1,023 0.23
--------- ------ --------- ------- --------- ------
Total gross loans, excluding money
market loan participations. 576,268 100.00% 483,336 100.00% 441,298 100.00%
====== ====== ======
Less:
Unadvanced funds on loans...... (26,096) (9,352) (11,950)
Deferred loan origination fees. (1,604) (1,562) (1,326)
Unearned discounts............. (10) (10) (289)
--------- --------- ---------
Total loans, excluding money
market loan participations. 548,558 472,412 427,733
Money market loan participations. 44,300 24,000 52,950
--------- --------- ---------
Total loans, net $ 592,858 $ 496,412 $ 480,683
========= ========= =========
At December 31,
-------------------------------------------------
1995 1994
----------------------- ----------------------
Percent Percent
Amount of total Amount of total
--------- --------- ------- ---------
(Dollars in thousands)
Mortgage loans:
One-to-four family............. $ 56,814 13.62% $ 57,792 14.62%
Multi-family................... 193,812 46.46 184,537 46.68
Commercial real estate......... 125,363 30.05 114,923 29.07
Construction and development... 10,288 2.47 8,096 2.05
Home equity.................... 7,420 1.78 7,791 1.97
Second......................... 17,680 4.24 17,369 4.40
--------- ----- --------- ------
Total mortgage loans......... 411,377 98.62 390,508 98.79
Commercial loans................. 4,584 1.10 3,062 0.77
Consumer loans................... 1,192 0.28 1,722 0.44
--------- ----- --------- ------
Total gross loans, excluding money
market loan participations. 417,153 100.00% 395,292 100.00%
====== ======
Less:
Unadvanced funds on loans...... (9,879) (8,158)
Deferred loan origination fees. (1,012) (767)
Unearned discounts............. (731) (731)
--------- ---------
Total loans, excluding money
market loan participations. 405,531 385,636
Money market loan participations. 43,100 36,400
--------- ---------
Total loans, net $ 448,631 $ 422,036
========= =========
11
Many of the Company's borrowers have done business with the Company
for years and have more than one loan outstanding. It is the Company's current
policy that the aggregate amount of loans outstanding to any one borrower or
related entities may not exceed 8.0% of the Bank's core capital (stockholders'
equity exclusive of unrealized gains or losses on securities available for sale,
net of income taxes) which, at December 31, 1998, amounted to $203.9 million. At
December 31, 1998, the largest borrower had aggregate loans outstanding of $13.7
million, or 6.7% of core capital. Including this borrower, there were 17
borrowers each with aggregate loans outstanding at December 31, 1998 in excess
of $5.0 million, the cumulative total of which was $116.5 million, or 21.2% of
loans outstanding, exclusive of money market loan participations. Most of this
cumulative amount is comprised of multi-family and commercial real estate
mortgage loans.
The following table shows the contractual maturity and repricing dates
of the Company's loan portfolio at December 31, 1998. The table does not include
prepayments or scheduled principal amortization.
At December 31, 1998
----------------------------------------------------------------------------------------
Real estate mortgage loans
------------------------------------------------------ Other
Home Money commercial
One-to- Commercial Construction equity and market and
four Multi- real and second loan consumer Total
family family estate development mortgage participations loans loans
-------- -------- -------- ---------- -------- -------------- --------- ---------
(In thousands)
Amounts due(1):
Within one year.................... $ 21,219 $ 66,525 $ 55,450 $ 9,857 $11,407 $44,300 $ 4,703 $ 213,461
-------- -------- -------- ------- ------- ------- ------- ---------
After one year:
More than one year to three years.. 39,297 29,448 21,244 - 1,374 - 1,876 93,239
More than three years to five years 3,755 100,905 63,921 - 658 - 3,285 172,524
More than five years to ten years. 101 55,346 48,167 117 1,509 - 322 105,562
More than ten years............... 95 2,892 6,584 - - - 115 9,686
-------- -------- -------- ------- ------- ------- ------- ---------
Total due after one year......... 43,248 188,591 139,916 117 3,541 - 5,598 381,011
-------- -------- -------- ------- ------- ------- ------- ---------
Total amount due................. $ 64,467 $255,116 $195,366 $ 9,974 $14,948 $44,300 $10,301 594,472
======== ======== ======== ======= ======= ======= =======
Less:
Deferred loan origination fees. (1,604)
Unearned discounts............. (10)
----------
Net loans.................... $ 592,858
=========
- - ---------------
(1) Amounts due are net of unadvanced funds on loans.
The following table sets forth at December 31, 1998 the dollar amount
of gross loans contractually due or scheduled to reprice after one year and
whether such loans have fixed interest rates or adjustable interest rates.
Due After One Year
--------------------------------
Fixed Adjustable Total
--------- --------- ---------
(In thousands)
Real estate mortgage loans:
One-to-four family................................................... $ 507 $ 42,741 $ 43,248
Multi-family......................................................... 77,549 111,042 188,591
Commercial real estate............................................... 79,062 60,854 139,916
Construction and development......................................... 117 - 117
Home equity and second mortgage...................................... 2,091 1,450 3,541
--------- --------- ---------
Total real estate mortgage loans.................................. 159,326 216,087 375,413
Commercial and consumer loans.......................................... 3,097 2,501 5,598
--------- --------- ---------
Total loans....................................................... $ 162,423 $ 218,588 $ 381,011
========= ========= =========
12
Non-Performing Assets and Restructured Loans
The following table sets forth information regarding non-performing
assets and restructured loans at the dates indicated.
At December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(Dollars in thousands)
Non-accrual loans (1):
Mortgage loans:
One-to-four family................................................ $ - $ 230 $ 428 $ 736 $ 296
Multi-family...................................................... - - 253 - 120
Commercial real estate............................................ 297 522 646 - -
Construction and development...................................... - - 6 6 763
Home equity....................................................... 35 51 - - 98
Commercial loans..................................................... - - - - -
Consumer loans....................................................... - - 4 6 7
-------- ------- ------- ------- ------
Total non-accrual loans........................................... 332 803 1,337 748 1,284
Other real estate owned, net (2)....................................... 1,940 2,373 1,689 1,722 1,805
-------- ------- ------- ------- ------
Total non-performing assets....................................... $ 2,272 $ 3,176 $ 3,026 $2,470 $3,089
======== ======= ======= ======= ======
Restructured loans..................................................... $ - $ 2,287 $ 5,438 $10,922 $5,728
======== ======= ======= ======= ======
Allowance for loan losses as a percent of total loans.................. 2.21% 2.51% 2.56% 2.75% 2.91%
Allowance for loan losses as a percent of total non-performing loans(3) 3,943.98 1552.05 921.91 1,647.86 955.92
Non-performing loans as a percent of total loans....................... 0.01 0.16 0.28 0.17 0.30
Non-performing assets as a percent of total assets..................... 0.26 0.45 0.45 0.39 0.51
(1) Non-accrual loans include all loans 90 days or more past due and other
loans which have been identified by the Company as presenting uncertainty
with respect to the collectibility of interest or principal.
(2) Other real estate owned balances are shown net of related loss allowances.
(3) Non-performing loans are comprised of non-accrual loans.
Loans are placed on non-accrual status either when reasonable doubt
exists as to the full timely collection of interest and principal or
automatically when a loan becomes past due 90 days.
At December 31, 1998, other real estate owned consisted of two
industrial properties carried at $1.9 million and residential condominium units
carried at $181,000, net of an aggregate valuation allowance of $186,000. For
the years ended December 31, 1998, 1997 and 1996, the Company received income,
net of expenses, of $259,000, $254,000 and $198,000, respectively, from the
rental of the two industrial properties. The Company expects to sell the
properties at prices in excess of their carrying value. Ultimate net sales
proceeds will depend on market conditions in effect at the time of sale. The
condominium units have been sold, but continue to be included in other real
estate owned until cash payments by the purchaser are sufficient to meet the
criteria for recording the transaction as a sale.
Restructured loans represent performing loans for which concessions
(such as reductions of interest rates to below market terms and/or extension of
repayment terms) were granted due to a borrower's financial condition. Based on
satisfactory payment performance, a significant pay-down of loan principal and
payment of interest at market rates, loans previously classified as restructured
were removed from that category in 1998.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for
loan losses based on management's on-going evaluation of the risks inherent in
the Company's loan portfolio. Factors considered in the evaluation process
include growth of the loan portfolio, the risk characteristics of the types of
loans in the portfolio, geographic and
13
large borrower concentrations, current regional economic and real estate market
conditions that could affect the ability of borrowers to pay, the value of
underlying collateral, and trends in loan delinquencies and charge-offs.
The Company utilizes an internal rating system to monitor and evaluate
the credit risk inherent in its loan portfolio. At the time of loan approval,
all loans other than one-to-four family residential mortgage loans, home equity
loans and consumer loans, are assigned a rating based on all the factors
considered in originating the loan. In the latter part of 1996, the Company
expanded the number of its loan ratings from five to eight. The initial loan
rating is recommended by the loan officer and approved by the individuals or
committee responsible for approving the loan. Loan officers are expected to
recommend to the Loan Committee changes in loan ratings when facts come to their
attention that warrant an upgrade or downgrade in a loan rating. Problem and
potential problem assets are assigned the three highest ratings. Such ratings
coincide with the "Substandard", "Doubtful" and "Loss" classifications used by
federal regulators in their examination of financial institutions. Generally, an
asset is considered Substandard if it is inadequately protected by the current
net worth and paying capacity of the obligors and/or the collateral pledged.
Substandard assets include those characterized by the distinct possibility that
the insured financial institution will sustain some loss if the deficiencies are
not corrected. Assets classified as Doubtful have all the weaknesses inherent in
those classified Substandard with the added characteristic that the weaknesses
present make collection or liquidation in full, on the basis of currently
existing facts, highly questionable and improbable. Assets classified as Loss
are those considered uncollectible and of such little value that their
continuance as assets without the establishment of a specific loss reserve
and/or charge-off is not warranted. Assets which do not currently expose the
insured financial institution to sufficient risk to warrant classification in
one of the aforementioned categories but possess weaknesses are designated
"Special Mention." The Bank assigns its fourth highest rating to loans meeting
this designation.
On a quarterly basis, management reviews with the Watch Committee the
status of each loan assigned one of the Company's four adverse internal ratings,
including the specific and general valuation allowances for losses deemed
prudent. General valuation allowances represent loss allowances established to
recognize the inherent risk associated with lending activities which, unlike
specific allowances, have not been allocated to particular problem loans. Loans,
or portions of loans, classified Loss are either charged-off against valuation
allowances or a specific allowance is established in an amount equal to the
amount classified Loss.
The Company's classification of its loans and the amount of the
valuation allowances it sets aside for estimated losses is subject to review by
the FDIC and the Division. Based on their reviews, these agencies can order the
establishment of additional general or specific loss allowances. The FDIC, in
conjunction with the other federal banking agencies, has adopted an interagency
policy statement on allowances for loan and lease losses. The policy statement
provides guidance for financial institutions on both the responsibilities of
management for the assessment and establishment of adequate allowances and
guidance for banking agency examiners to use in determining the adequacy of a
financial institution's valuation methodology. Generally, the policy statement
recommends that financial institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management analyze
all significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management establish acceptable valuation processes
that meet the objectives set forth in the policy statement. While the Company
believes that it has established an adequate allowance for loan losses, there
can be no assurance that the regulators, in reviewing the Company's loan
portfolio, will not request the Company to materially increase its allowances
for loan losses. Although management believes that adequate specific and general
loan loss allowances have been established, actual losses are dependent upon
future events and, as such, further additions to the level of specific and
general loss allowances could become necessary.
14
The following table sets forth activity in the Company's allowance for
loan losses for the periods set forth in the table.
Year ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
(In thousands)
Balance at beginning of period.............. $ 12,463 $ 12,326 $ 12,236 $ 12,274 $ 12,745
Provision (credit) for loan losses.......... 300 - - - (477)
Charge-offs:
Mortgage loans:
One-to-four family...................... - - - - 3
Multi-family............................ - - - - 13
Commercial real estate.................. - - 151 237 -
Construction and development............ - - - - -
Home equity............................. - - - - -
Second mortgage......................... - - - - -
Commercial loans.......................... - - - - -
Consumer loans............................ 1 6 15 3 24
Money market loan participations.......... - - - - -
-------- --------- --------- --------- --------
Total charge-offs..................... 1 6 166 240 40
-------- --------- --------- --------- --------
Recoveries:
Mortgage loans:
Multi-family............................ - 25 140 271 31
Commercial real estate.................. 293 8 - 6 5
Construction and development............ - 103 21 - -
Consumer loans............................ 5 7 5 15 10
-------- --------- --------- --------- --------
Total recoveries...................... 332 143 166 292 46
-------- --------- --------- --------- --------
Net recoveries.............................. 331 137 - 52 6
-------- --------- -------- --------- --------
Balance at end of period.................... $ 13,094 $ 12,463 $ 12,326 $ 12,326 $ 12,274
======== ========= ========= ========= ========
The following tables set forth the Company's percent of allowance by
loan category and the percent of loans to total loans in each of the categories
listed at the dates indicated.
At December 31,
----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ----------------------------- ------------------------------
Percent Percent Percent
of loans of loans of loans
Percent of in each Percent of in each Percent of in each
allowance category allowance category allowance category
to total to gross to total to gross to total to gross
Amount allowance loans Amount allowance loans Amount allowance loans
------- --------- -------- ------ --------- -------- ------ ---------- --------
(Dollars in thousands)
Mortgage loans:
One- to four-family........... $ 226 1.73% 11.19% $ 241 1.93% 14.26% $ 202 1.64% 13.08%
Multi-family.................. 3,610 27.57 45.58 2,993 24.02 45.50 2,725 22.11 45.40
Commercial real estate........ 4,214 32.18 34.29 3,376 27.09 30.94 3,256 26.42 31.60
Construction and development.. 526 4.02 2.99 384 3.08 2.77 463 3.76 1.65
Home equity................... 55 .42 .96 53 .43 1.09 64 0.52 1.45
Second........................ 70 .53 2.42 79 .63 3.28 99 0.80 4.50
Commercial loans................. 379 2.89 2.26 95 .76 1.87 110 0.89 2.09
Consumer loans................... 18 .14 .31 14 .11 .29 10 0.08 0.23
Money market loan participations. - - - - - - - - -
Unallocated...................... 3,996 30.52 - 5,228 41.95 - 5,397 43.78 -
------- ------ ------ ------- ------ ------ ------- ------ ------
Total allowance for loan losses $13,094 100.00% 100.00% $12,463 100.00% 100.00% 12,326 100.00% 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ======
15
At December 31,
-----------------------------------------------------------------------------------
1995 1994
------------------------------------------- --------------------------------------
Percent Percent
of loans of loans
Percent of in each Percent of in each
allowance category allowance category
to total to gross to total to gross
Amount allowance loans Amount allowance loans
-------- ---------- -------- ------- ----------- ----------
(Dollars in thousands)
Mortgage loans:
One- to four-family............ $ 199 1.61% 13.62% $ 202 1.65% 14.62%
Multi-family................... 3,177 25.78 46.46 2,956 24.08 46.68
Commercial real estate......... 2,695 21.86 30.05 2,534 20.64 29.07
Construction and development... 504 4.09 2.47 445 3.63 2.05
Home equity.................... 74 0.60 1.78 78 0.63 1.97
Second......................... 133 1.08 4.24 130 1.06 4.39
Commercial loans................. 92 0.75 1.10 61 0.50 0.78
Consumer loans................... 12 0.10 0.28 17 0.14 0.44
Money market loan participations. - - - - - -
Unallocated...................... 5,440 44.13 - 5,851 47.67 -
-------- ------ ------ -------- ------ ------
Total allowance for loan losses $ 12,326 100.00% 100.00% $ 12,274 100.00% 100.00%
======== ====== ====== ======== ====== ======
The amounts allocated to loan categories in the above table are
determined by consideration of several factors. Specific amounts are allocated
on a loan-by-loan basis for any impairment loss as determined by applying one of
the three methods cited in generally accepted accounting principles. In
addition, general reserves are established based on long-term trends in loan
charge-offs by category and the total of loans according to the Company's
internal ratings.
At December 31, 1998, there were no loans which warranted specific
reserves. Regarding charge-offs, the Company has experienced recoveries at least
equal to or in excess of charge-offs in each of the past five years. The Company
believes this favorable experience is attributable to the robust economy of the
past few years and is not sustainable over normal lending cycles. Accordingly,
the Company has continued to apply charge-off percentages in line with
experience over longer-term lending cycles. Finally, higher general reserves are
applied to loans with ratings above the Company's two best internal ratings.
At December 31, 1998, loans designated as Substandard and Special
Mention totaled $2.3 million and $1.9 million, respectively. No loans were
designated as Doubtful or Loss. The Substandard category included 7 loans, the
two largest of which were $958,000 and $873,000, respectively. The two loans are
secured by office buildings. Loan payments are current and the estimated market
value of the underlying collateral exceeds the loan balances. The Special
Mention category is comprised of a $1.9 million loan secured by an office
building. The loan is adequately secured and payments are current.
During 1998, the allowance for loan losses was increased by $631,000
as a result of net loan recoveries of $331,000 and a provision for loan losses
of $300,000. The Company increased the allowance primarily because of
significant growth of the loan portfolio, substantially all of which pertained
to the higher risk areas of multi-family and commercial real estate mortgage
lending. Total loan growth amounted to $76.1 million exclusive of the increase
in money market loan participations.
For the past several years, a portion of the Company's allowance for
loan losses has been categorized as unallocated rather than being allocated to
specific loan categories. The unallocated part of the allowance has been
maintained in recognition of the inherent risks resulting from the following
concentrations in the Company's portfolio: the significance of loans pertaining
to multi-family apartment buildings and commercial real estate properties, the
geographic location of such properties and the aggregate amount of loans
outstanding to larger borrowers. The combination of these three concentrations
creates a higher than normal degree of risk in the Company's loan portfolio. A
downturn in economic conditions in the Company's primary lending area could have
adverse consequences on the collectibility of the loan portfolio in a relatively
short period of time.
16
The decline in the unallocated portion of the allowance in 1998 is
attributable to the loan growth mentioned above and the fact that most of the
new loan production did not warrant the two best internal ratings. Such ratings
are typically assigned to only a few new loans and to seasoned loans with
excellent credit performance. The Company has no established range into which
the unallocated portion of the allowance should fall. Instead, the
reasonableness of the unallocated portion is considered based on management's
collective assessment of all the factors cited in the beginning of this section.
Deposits
Historically, deposits have been the Company's primary source of
funds. The Company offers a variety of deposit accounts with a range of interest
rates and terms. The Company's deposit accounts consist of non-interest-bearing
checking accounts and interest-bearing NOW accounts, savings accounts and money
market savings accounts (referred to in the aggregate as "transaction deposit
accounts") and certificate of deposit accounts. The Company offers Individual
Retirement Accounts ("IRAs") and other qualified plan accounts.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and the
relative attractiveness of competing deposit and investment alternatives. During
the past few years, the strength of the stock market has affected deposit flows
as some customers have opted to place their funds in instruments such as mutual
funds rather than in deposit products perceived to have less attractive returns.
The Company's deposits are obtained predominantly from customers in the Town of
Brookline and surrounding communities. The Company relies primarily on
competitive pricing of its deposit products, customer service and long-standing
relationships with customers to attract and retain deposits. Market interest
rates and rates offered by competing financial institutions significantly affect
the Company's ability to attract and retain deposits. The Company uses
traditional means of advertising its deposit products, including transit and
print media, and generally does not solicit deposits from outside its market
area. The Company does not use brokers to obtain deposits.
The following table presents the deposit activity of the Company for
the periods indicated.
Year ended December 31,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
(In thousands)
Net withdrawals................................ $ (14,132) $ (23,403) $ (13,073)
Interest credited on deposit accounts.......... 21,198 21,691 22,874
---------- ---------- ----------
Total increase (decrease) in deposit accounts.. $ 7,066 $ (1,712) $ 9,801
========== ========== ==========
17
The following table sets forth the distribution of the Company's
average deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented. Averages for the periods
presented utilize average daily balances.
Year ended December 31, 1998 Year ended December 31, 1997
------------------------------ --------------------------------
Percent Percent
of total Weighted of total Weighted
Average average average Average average average
balance deposits rate balance deposits rate
-------- -------- -------- ------- -------- ---------
(Dollars in thousands)
NOW accounts........................................... $ 39,766 8.33% 1.55% $ 37,544 7.79% 1.72%
Savings accounts....................................... 14,510 3.04 2.45 15,063 3.13 2.50
Money market savings accounts.......................... 164,134 34.39 3.87 158,578 32.90 3.85
Non-interest-bearing demand checking accounts.......... 11,908 2.50 - 9,890 2.05 -
--------- ------ --------- -------
Total transaction deposit accounts................. 230,318 48.26 3.18 221,075 45.87 3.22
--------- ------ --------- -------
Certificate of deposit accounts:
Six months or less................................... 63,273 13.26 5.09 67,691 14.05 5.20
Over six months through 12 months.................... 103,478 21.68 5.40 107,490 22.30 5.44
Over 12 months through 24 months..................... 27,369 5.73 5.62 28,196 5.85 5.75
Over 24 months....................................... 52,850 11.07 6.25 57,516 11.93 6.31
--------- ------ --------- -------
Total certificate of deposit accounts.............. 246,970 51.74 5.51 260,893 54.13 5.58
--------- ------ --------- -------
Total average deposits............................. $ 477,288 100.00% 4.39% $ 481,968 100.00% 4.50%
========= ====== ========= ======
Year ended December 31, 1996
----------------------------------
Percent
of total Weighted
Average average average
balance deposits rate
--------- -------- --------
(Dollars in thousands)
NOW accounts........................................... $ 37,095 7.72% 1.73%
Savings accounts....................................... 17,302 3.60 2.46
Money market savings accounts.......................... 154,541 32.16 3.85
Non-interest-bearing demand checking accounts.......... 9,595 2.00 -
--------- ------
Total transaction deposit accounts................. 218,533 45.48 3.21
--------- ------
Certificate of deposit accounts:
Six months or less................................... 67,402 14.02 5.20
Over six months through 12 months.................... 107,064 22.28 5.60
Over 12 months through 24 months..................... 32,298 6.72 5.84
Over 24 months....................................... 55,243 11.50 6.09
--------- ------
Total certificate of deposit accounts.............. 262,007 54.52 5.63
--------- ------
Total average deposits............................. $ 480,540 100.00% 4.53%
========= ======
A declining interest rate environment during the past two years has
resulted in some shifting of deposits from certificate of deposit accounts to
more liquid and shorter term transaction deposit accounts and only a modest
amount of deposit growth. The attractiveness of deposits to customers has
diminished as customers have viewed other financial instruments such as mutual
funds, annuities and the stock market as offering greater earnings potential.
While the Company is not anticipating any significant reduction in its deposits,
it has ample liquidity and access to funds to process deposit outflows if such a
trend were to arise.
18
The following table presents, by various rate categories, the amount
of certificate of deposit accounts outstanding at the dates indicated.
Period to maturity from December 31, 1998
-----------------------------------------------------------------------
Less Three Four
than One to Two to to to At
one two three four five December 31,
year years years years years 1998
--------- -------- -------- ------- ------- ----------
(In thousands)
Certificate of deposit accounts:
4.01% to 5.00%................... $ 63,088 $ 3,386 $ - $ - $ - $ 66,474
5.01% to 6.00%................... 126,022 17,894 9,676 2,011 3,788 159,391
6.01% to 7.00%................... 3,101 1,137 2,521 3,693 - 10,452
7.01% to 7.50%................... 2,417 9,320 - - - 11,737
--------- -------- -------- ------- ------- ----------
Total............................ $ 194,628 $ 31,737 $ 12,197 $ 5,704 $ 3,788 $ 248,054
========= ======== ======== ======= ======= ==========
At December 31, 1998, the Company had outstanding $47.8 million in
certificate of deposit accounts of $100,000 or more, maturing as follows:
Weighted
Amount average rate
-------- ------------
(Dollars in thousands)
Maturity Period
- - ---------------
Three months or less............................ $ 12,564 5.12%
Over three months through six months............ 10,720 5.15
Over six months through twelve months........... 16,140 5.49
Over twelve months.............................. 8,374 6.17
--------
$ 47,798 5.42%
========
Borrowed Funds
The Company utilizes advances from the FHLB primarily in connection
with its management of the interest rate sensitivity of its assets and
liabilities. The advances are collateralized primarily by certain of the
Company's mortgage loans and secondarily by the Company's investment in the
stock of the FHLB. The maximum amount that the FHLB will advance to member
institutions, including the Company, fluctuates from time to time in accordance
with the policies of the FHLB. At December 31, 1998, the Company had $94.4
million in outstanding advances from the FHLB and had the capacity to increase
that amount to $300.9 million. The Company expects to continue to utilize
borrowings from the FHLB as part of its management of the interest sensitivity
of its assets and liabilities.
The following table sets forth certain information regarding borrowed
funds for the dates indicated:
Year ended December 31,
-----------------------------------
1998 1997 1996
--------- -------- --------
(Dollars in thousands)
Advances from the FHLB:
Average balance outstanding................................. $ 78,295 $ 63,771 $ 55,497
Maximum amount outstanding at any month end
during the period........................................ 98,415 69,265 62,665
Balance outstanding at end of period........................ 94,350 69,265 60,565
Weighted average interest rate during the period............ 6.34% 6.52% 6.64%
Weighted average interest rate at end of period............. 6.02% 6.33% 6.49%
19
Subsidiary Activities
Brookline Securities Corp. ("BSC") is a wholly-owned subsidiary of the
Company and BBS Investment Corporation ("BBS") is a wholly-owned subsidiary of
the Bank. These companies were established as Massachusetts security
corporations for the purpose of buying, selling and holding investment
securities on their own behalf and not as a broker. The income earned on their
investment securities is subject to a significantly lower rate of state tax than
that assessed on income earned on investment securities maintained at the
Company and the Bank. At December 31, 1998, BSC and BBS had total assets of
$56.8 million and $100.7 million, respectively, $55.9 million and $98.9 million,
respectively, of which were in investment securities and short-term investments.
160 Associates, Inc. ("Associates") is a wholly-owned subsidiary of
the Bank established as a Massachusetts corporation primarily for the purpose of
acquiring and holding stock in a subsidiary engaged in business that qualifies
as a real estate investment trust. The amount of capital Associates invested in
such activity amounted to $265.9 million at December 31, 1998.
Brookline Preferred Capital Corporation ("BPCC") was established in
January 1997 as a Massachusetts corporation to engage in real estate business
activities (including the acquisition and holding of securities and mortgage
loans) that enable it to be taxed as a real estate investment trust for federal
and Massachusetts tax purposes. At December 31, 1998, BPCC had total assets of
$267.2 million, $246.0 million of which were mortgage loans originated by and
acquired from the Bank. BPCC is a 99.9% owned subsidiary of Associates.
Personnel
As of December 31, 1998, the Company had 89 full-time employees and 11
part-time employees. The employees are not represented by a collective
bargaining unit and the Company considers its relationship with its employees to
be good.
Item 2. Properties
The branch located in the Company's main office is owned by the
Company. The other four branches of the Company, its loan production office in
Worcester and its operations center in Brookline are leased from unrelated third
parties. The operations center is used primarily to house operations and support
services. At December 31, 1998, the net book value of premises and leasehold
improvements was $621,000. Refer to Note 13 of the Notes to Consolidated
Financial Statements on page 43 of the Annual Report for information regarding
the Company's lease commitments at December 31, 1998.
Item 3. Legal Proceedings
The Company is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business
which, in the aggregate, involve amounts which are believed by management to be
immaterial to the financial condition and results of operations of the Company.
Item 4. Submission Of Matters To A Vote Of Security Holders
None
20
PART II
Item 5. Market For The Registrant's Common Stock And Related Security Holder
Matters
The common stock of the Company is traded on the Nasdaq National
Market System. The approximate number of holders of common stock as of December
31, 1998 as well as a table setting forth cash dividends paid on common stock
and the high and low closing prices of the common stock for each of the quarters
in the year ended December 31, 1998 appears on Page 51 of the Company's 1998
Annual Report which is incorporated herein by reference.
Item 6. Selected Consolidated Financial Data
Selected Consolidated Financial Data of the Company appears on pages 1
and 2 of the Company's 1998 Annual Report which is incorporated herein by
reference.
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations appears on pages 6 through 19 of the Company's 1998 Annual
Report which is incorporated herein by reference.
Item 7a. Quantitative And Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk appears on
pages 12 through 14 of the Company's 1998 Annual Report which is incorporated
herein by reference.
Item 8. Financial Statements And Supplementary Data
The following financial statements and supplementary data appear on
the pages indicated of the Company's 1998 Annual Report which is incorporated
herein by reference:
Pages
-----
Report of Independent Certified Public Accountants 20
Consolidated Balance Sheets as of December 31, 1998 and 1997 21
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996 22
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1998, 1997 and 1996 23
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 24
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 25-26
Notes to Consolidated Financial Statements 27-49
Item 9. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosures
None.
21
PART III
Item 10. Directors And Executive Officers Of The Registrant
A listing of and information about the Company's Directors and
Executive Officers appears on pages 4 and 5 of the Company's proxy statement
dated March 15, 1999 which is incorporated herein by reference.
Item 11. Executive Compensation
Executive Compensation is presented on page 9 of the Company's proxy
statement dated March 15, 1999 which is incorporated herein by reference.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
Security Ownership of Certain Beneficial Owners and Management is
presented on pages 2 and 3 of the Company's proxy statement dated March 15, 1999
which is incorporated herein by reference.
Item 13. Certain Relationships And Related Transactions
Certain Relationships and Related Transactions are presented on page
14 of the Company's proxy statement dated March 15, 1999 which is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K
(a) Documents
(1) Financial Statements: All financial statements are included
in Item 8 of Part II of this Report.
(2) Financial Statement Schedules: All financial statement
schedules have been omitted because they are not required,
not applicable or are included in the consolidated
financial statements or related notes.
(3) Exhibits
EXHIBIT INDEX
Exhibit Description
- - ------ -----------
3.1 Articles of Organization of the Company. (Exhibit 3.1 to
Registration Statement (No. 333-69245) on Form S-1 filed on
November 18, 1997)**
3.2 Bylaws of the Company (Exhibit 3.2 to Form S-1 filed on November
18, 1997)**
4 Form of Common Stock Certificate of the Company (Exhibit 4 to Form
S-1 filed on November 18, 1997)**
10.1 Form of Employment Agreement (Exhibit 10.1 to Form S-1 filed on
November 18, 1997)**
10.2 Form of Severance Agreement (Exhibit 10.2 to Form S-1 filed on
November 18, 1997)**
22
10.3 Supplemental Retirement Income Agreement with Richard P. Chapman,
Jr. (Exhibit 10.3 to Form S-1 filed on November 18, 1997)**
10.4 Supplemental Retirement Income Agreement with Susan M. Ginns
(Exhibit 10.4 to Form S-1 filed on November 18, 1997)**
10.5 Supplemental Retirement Income Agreement with Charles H. Peck
(Exhibit 10.5 to Form S-1 filed on November 18, 1997)**
10.6 Amended Employee Stock Ownership Plan
11 Statement Regarding Computation of Per Share Earnings - Earnings
per share is not presented for the period from March 24, 1998 (the
date of Conversion to a stock company) through December 31, 1998
as the earnings per share calculation for that period is not
meaningful.
12 Statement Regarding Computation of Ratios - Such computation can
be clearly determined from the material contained in this Report.
13 1998 Annual Report to Stockholders
21 Subsidiaries of the Registrant - This information is presented in
Item 1. Business - Subsidiary Activities of this Report.
22 Published Report Regarding Matters Submitted to Vote of Security
Holders - the Company's 1999 Stock Option Plan and 1999
Recognition and Retention Plan included in the Company's Proxy
Statement dated March 15, 1999, and incorporated herein by
reference)
27 EDGAR Financial Data Schedule
- - -----------
** Filed as part of a previous Commission filing and incorporated
herein by reference.
(b) Reports on Form 8-K - No reports on Form 8-K were filed by the
Company during the quarter ended December 31, 1998.
Signatures
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized
BROOKLINE BANCORP, INC.
Date: March 24, 1999 By: /s/ Richard P. Chapman, Jr
---------------------------------------
Richard P. Chapman, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Richard P. Chapman, Jr. By: /s/ Paul R. Bechet
------------------------------------------- ----------------------------------------------
Richard P. Chapman, Jr., President, Chief Paul R. Bechet, Senior Vice President and
Executive Officer and Director Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 24, 1999 Date: March 24, 1999
By: /s/ Oliver F. Ames By: /s/ Hollis W. Plimpton
------------------------------------------- ----------------------------------------------
Oliver F. Ames, Director Hollis W. Plimpton, Director
By: /s/ Dennis S. Aronowitz By:
------------------------------------------- ----------------------------------------------
Dennis S. Aronowitz, Director Edward D. Rowley, Director
By: /s/ George C. Caner, Jr. By: /s/ Joseph J. Slotnik
------------------------------------------- ----------------------------------------------
George C. Caner, Jr., Director Joseph J. Slotnik, Director
By: /s/ David C. Chapin By: /s/ William V. Tripp, III
------------------------------------------- ----------------------------------------------
David C. Chapin, Director William V. Tripp, III, Director
By: /s/ William G. Coughlin By: /s/ Rosamond B. Vaule
------------------------------------------- ----------------------------------------------
William G. Coughlin, Director Rosamond B. Vaule, Director
By: /s/ John L. Hall, II By: /s/ Peter O. Wilde
------------------------------------------- ----------------------------------------------
John L. Hall, II, Director Peter O. Wilde, Director
By: /s/ Charles H. Peck By: /s/ Franklin Wyman, Jr.
------------------------------------------- ----------------------------------------------
Charles H. Peck, Director Franklin Wyman, Jr., Director
24
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report. Prior to March 24, 1998, the Company had no
significant assets, liabilities or operations, and accordingly, the data prior
to such time represents the financial condition and results of operations of the
Bank.
At December 31,
1998 1997 1996 1995 1994
---------- ----------- ----------- ---------- ----------
(In thousands)
Selected Financial Condition Data:
Total assets............................................ $ 879,027 $ 701,119 $ 666,988 $ 632,788 $ 607,737
Loans, excluding money market loan participations....... 548,558 472,412 427,733 405,531 385,636
Money market loan participations........................ 44,300 24,000 52,950 43,100 36,400
Allowance for loan losses............................... 13,094 12,463 12,326 12,326 12,274
Debt securities:
Available for sale.................................... 102,934 89,620 97,007 62,691 31,585
Held to maturity...................................... 121,390 65,444 41,620 89,342 125,126
Marketable equity securities............................ 30,595 28,017 20,365 19,074 13,301
Deposits................................................ 489,370 482,304 484,016 474,215 471,811
Borrowed funds.......................................... 94,350 69,265 60,565 49,665 43,265
Stockholders' equity.................................... 278,222 132,757 113,947 100,583 85,722
Net unrealized gain on securities available for sale, net of
taxes, included in stockholders' equity............... 14,416 13,739 8,660 7,233 4,100
Non-performing loans.................................... 332 803 1,337 748 1,284
Non-performing assets................................... 2,272 3,176 3,026 2,470 3,089
Year ended December 31,
1998 1997 1996 1995 1994
---------- ----------- ----------- ---------- ----------
(In thousands)
Selected Operating Data:
Interest income......................................... $ 61,419 $ 54,125 $ 51,019 $ 48,920 $ 39,943
Interest expense........................................ 26,160 25,858 25,458 23,938 17,761
--------- --------- --------- --------- ---------
Net interest income................................... 35,259 28,267 25,561 24,982 22,182
Provision (credit) for loan losses...................... 300 -- -- -- (477)
--------- --------- --------- --------- ---------
Net interest income after provision
(credit) for loan losses............................ 34,959 28,267 25,561 24,982 22,659
Gains on sales of securities, net....................... 2,843 74 464 877 4
Other real estate owned income (expense), net........... 251 238 299 (40) (741)
Other non-interest income............................... 1,111 853 1,077 768 816
Non-interest expense.................................... (9,181) (8,374) (7,713) (7,450) (7,696)
--------- --------- --------- --------- ---------
Income before income taxes............................ 29,983 21,058 19,688 19,137 15,042
Provision for income taxes.............................. 10,831 7,327 7,751 7,409 5,942
--------- --------- --------- --------- ---------
Net income............................................ $ 19,152 $ 13,731 $ 11,937 $ 11,728 $ 9,100
========= ========= ========= ========= =========
SELECTED FINANCIAL RATIOS AND OTHER DATA OF THE COMPANY
At or for the year ended December 31,
1998 1997 1996 1995 1994
---------- ----------- ----------- ---------- ----------
Performance Ratios:
Return on average assets................................ 2.33% 2.02% 1.84% 1.91% 1.59%
Return on average stockholders' equity (1).............. 8.36 12.21 11.95 13.42 11.89
Interest rate spread (2)................................ 2.76 3.08 3.10 3.37 3.40
Net interest margin (2)................................. 4.28 4.09 4.00 4.15 3.96
Efficiency ratio (3).................................... 25.07 28.45 28.15 28.02 34.57
Capital Ratios:
Stockholders' equity to total assets at end of year..... 31.65 18.94 17.08 15.89 14.11
Tier 1 leverage capital ratio at end of year (Bank only) 25.86 17.82 15.86 14.96 13.63
Asset Quality Ratios:
Non-performing assets as % of total assets at end of year 0.26 0.45 0.45 0.39 0.51
Allowance for loan losses as % of loans, excluding
money market loan participations, at end of year...... 2.39 2.64 2.88 3.04 3.18
Allowance for loan losses as % of total
non-performing loans at end of year................... 3,943.98 1,552.05 921.91 1,647.86 955.92
Per Share Data:
Basic earnings per common share......................... NM -- -- -- --
Diluted earnings per common share....................... NM -- -- -- --
Number of shares outstanding at
end of period (in thousands) (4)................... 28,595 -- -- -- --
Dividends per common share (5).......................... $ 0.10 -- -- -- --
Book value per common share at end of period ........... $ 9.73 -- -- -- --
Market value per common share at end of period ......... $ 11.50 -- -- -- --
- - --------------------
(1) Excludes effect of unrealized gains on securities available for sale, net of
taxes.
(2) Calculated on a fully-taxable equivalent basis.
(3) Represents the ratio of non-interest expenses divided by the sum of net
interest income and non-interest income exclusive of gains of sales of
securities.
(4) Common stock issued less treasury stock and unallocated common stock held by
ESOP.
(5) Two quarterly dividends of $ 0.05 each were paid in 1998.
NM - Not Meaningful. Earnings per share is not presented for the period from
March 24, 1998 (the date of conversion to stock-ownership) through December 31,
1998 as the earnings per share calculation for that period is not meaningful.
Earnings per share is not presented for the periods prior to the conversion to
stock form since the Bank was a mutual savings bank and no stock was
outstanding.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reorganization and Stock Offering
Brookline Bancorp, Inc. (the "Company") was organized in November 1997 for the
purpose of becoming the sole stockholder of Brookline Savings Bank (the "Bank")
upon completion of the reorganization of the Bank 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 and 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. Proceeds from the Offering, net of $2.0 million of expenses
related to 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
proceeds retained by the Company have been used primarily to fund a loan to the
Bank's employee stock ownership plan, repurchase Company shares in the open
market and invest in interest-bearing debt obligations.
General
The Company's activities consist principally of investment activities and the
holding of the Bank's stock. The Company's business operations are conducted
primarily through the Bank. As a result, references to the Company in the
following discussion generally refer to the consolidated operations of the
Company and the Bank.
The Company's primary business is attracting retail deposits from the general
public through its five full-service banking offices and investing those
deposits and other borrowed funds primarily in real estate mortgage loans and
various debt and equity securities. The Company also operates a loan production
office in Worcester, Massachusetts that was opened in mid-1998. The Company
emphasizes the origination of multi-family and commercial real estate mortgage
loans. The Company's consolidated net income depends largely upon net interest
income, which is the difference between interest income from loans and
investments ("interest-earning assets") and interest expense on deposits and
borrowed funds ("interest-bearing liabilities"). Net interest income is
significantly affected by general economic conditions, policies established by
the Federal Reserve Board and competition.
The following discussion contains forward-looking statements based on
management's current expectations regarding economic, competitive, legislative
and regulatory issues that may impact the Company's earnings in future periods.
Any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limitation, 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 Company's ability to originate quality loans,
fluctuation of interest rates, real estate market conditions in the Company's
lending areas, general and local economic conditions, competition, the Company's
continued ability to attract and retain deposits, the Company's ability to
control costs, new accounting pronouncements and changing regulatory
requirements.
The discussion and analysis that follows focuses on the factors affecting the
Company's consolidated financial condition at December 31, 1998 and 1997 and
consolidated results of operations during 1998, 1997 and 1996. The consolidated
financial statements and related notes appearing elsewhere in this annual report
should be read in conjunction with this review.
Overview
The reorganization and stock offering completed on March 24, 1998 significantly
affected the Company's consolidated financial statements. As of that date,
$134.8 million of net proceeds from the sale of stock was added to the Company's
equity. The reinvestment of those funds through December 31, 1998 contributed
significantly to the increase in net income in 1998 over 1997 net income.
Earnings per share is not presented from March 24, 1998 through December 31,
1998 as the earnings per share calculation for that period is not meaningful.
Earnings per share is not presented for the periods prior to the conversion to
stock form since the Bank was a mutual savings bank and no stock was
outstanding.
Financial Condition
Total assets increased by $177.9 million, or 25.4%, from $701.1 million at
December 31, 1997 to $879.0 million at December 31, 1998. Asset growth was
funded primarily from the net proceeds of the Offering completed on March 24,
1998 ($134.8 million), operating earnings, additional funds borrowed from the
Federal Home Loan Bank of Boston ("FHLB") and a modest increase in deposits.
Initially, the net proceeds of the Offering were used primarily to acquire
short-term investments (including money market loan participations) and debt
obligations generally maturing in two years or less. Subsequently, the net
proceeds were also used to fund part of the loan growth and purchase the
Company's stock for the Bank's employee stock ownership plan ("ESOP") and
buy-back program.
Securities available for sale and securities held to maturity amounted to $254.9
million, or 29.0%, of total assets at December 31, 1998 and $183.1 million, or
26.1%, of total assets at December 31, 1997. These investments were primarily in
U.S. Government and Agency obligations (1998: $92.8 million; 1997: $82.3
million) and corporate obligations (1998: $125.2 million; 1997: $71.5 million).
Most of these debt obligations mature within two years. In the second half of
1998, the Company increased its investment in corporate obligations as the yield
on such investments widened in comparison to yields on U.S. Government
obligations. The Company also purchased a modest amount ($6.0 million) of
collateralized mortgage obligations with average maturities of about three years
for yield enhancement. Securities available for sale also include marketable
equity securities valued at $30.6 million at December 31, 1998 and $28.0 million
at December 31, 1997. These amounts include net unrealized gains of $22.7
million and $21.9 million at those respective dates. The portfolio is comprised
primarily of the stock of national and regional money center banks, Freddie Mac
and utility companies.
Money market loan participations amounted to $44.3 million at December 31, 1998
and $24.0 million at December 31, 1997. The participations represent purchases
of a portion of loans to national companies and organizations originated and
serviced by money center banks. The participations generally mature between one
day and three months. The Company views such participations as an alternative
investment to slightly lower yielding short-term investments.
Excluding money market loan participations, the loan portfolio increased by
$76.1 million, or 16.1%, from $472.4 million at December 31, 1997 to $548.5
million at December 31, 1998. Of this increase, $53.8 million took place in the
second half of 1998 as borrowers took advantage of a declining interest rate
environment to refinance existing debt and increase their real estate
borrowings. The loan growth (net of unadvanced funds) was primarily in the
commercial real estate and multi-family mortgage loan segments of the portfolio.
Commercial real estate mortgage loans increased $41.8 million to $190.3 million
and multi-family mortgage loans increased $35.2 million to $250.6 million.
One-to- four family mortgage loans declined by $4.6 million to $64.5 million.
Total deposits increased by $7.1 million, or 1.5%, from $482.3 million at
December 31, 1997 to $489.4 million at December 31, 1998. It is estimated that
deposits declined approximately $11 million in connection with the stock
offering as some of the eligible depositors paid for their stock purchases by
withdrawing funds from deposit accounts. The strength of the stock market and
the low interest rate environment of the past two years has attracted some
depositors to place funds in other financial instruments such as mutual funds
and annuities.
The Company increased its borrowings from the FHLB from $69.3 million at
December 31, 1997 to $94.4 million at December 31, 1998 as part of its efforts
to manage interest rate risk. As loan customers have sought to lock in fixed
rates for several years, the Company has extended its use of borrowings with
maturities in the five year range.
The increase in stockholders' equity from $132.8 million at December 31, 1997 to
$278.2 million at December 31, 1998 resulted primarily from the receipt of
$134.8 million in net proceeds from the stock offering and net income of $19.2
million less funds used to pay two quarterly dividends of $0.05 each per share
($2.9 million) and purchase Company shares. On March 24, 1998, the Board of
Directors approved an ESOP and authorized it to purchase up to 4% of the common
stock sold in the stock offering, or 546,986 shares. As of December 31, 1998,
407,600 shares had been purchased in the open market at an aggregate cost of
$5.2 million, or $12.88 per share. For the period ended December 31, 1998,
21,143 shares were committed to be released to employees. On October 20, 1998,
the Company received regulatory approval to acquire 1,454,750 shares, or 5% of
total common shares outstanding. The Board of Directors delegated to the
discretion of the Company's senior management the authority to determine the
timing of the repurchases and the prices at which repurchases will be made. No
time limit was established for completion of the program. As of December 31,
1998, the Company purchased 113,500 shares at an aggregate cost of $1.3 million,
or $11.59 per share.
Unrealized gains on securities available for sale are reported as accumulated
other comprehensive income. Such gains amounted to $23.2 million ($14.4 million
on an after-tax basis) at December 31, 1998 and $22.0 million ($13.7 million on
an after-tax basis) at December 31, 1997. The net increase is after realization
of $2.8 million ($1.7 million on an after-tax basis) of gains from sales of
marketable equity securities during 1998.
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:
December 31,
---------------------------------
1998 1997
---------- ----------
(In thousands)
Non-accrual loans:
Mortgage loans:
Commercial $ 297 $ 522
One-to-four family -- 230
Home equity 35 51
---------- ----------
Total non-accrual loans 332 803
Other real estate owned, net of allowance
for losses of $186 and $186, respectively 1,940 2,373
---------- ----------
Total non-performing assets $ 2,272 $ 3,176
========== ==========
Restructured loans $ -- $ 2,287
========== ==========
Allowance for loan losses $ 13,094 $ 12,463
========== ==========
December 31,
---------------------------------
1998 1997
---------- ----------
Allowance for loan losses as a percent
of total loans 2.21% 2.51%
Allowance for loan losses as a percent
of total loans, excluding money market
loan participations 2.39 2.64
Non-accrual loans as a percent of total loans 0.01 0.16
Non-performing assets as a percent of
total assets 0.26 0.45
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 $1.4 million at December 31, 1998 and $2.2 million at December
31, 1997. None of the impaired loans at these dates required a specific
allowance for impairment due primarily to prior charge-offs and/or the
sufficiency of collateral values.
During 1998 and 1997, the Company charged off loans amounting to $1,000 and
$6,000, respectively, and recovered $332,000 and $143,000, respectively, of
loans charged off in prior years. Despite the low level of non-performing loans,
the Company increased its allowance for loan losses by the amount of net loan
recoveries and a provision of $300,000 charged to earnings in 1998 (none in
1997). Management deemed it prudent to increase the allowance in 1998 in light
of the $76.1 million increase in net loans outstanding (exclusive of money
market loan participations), most of which occurred in the higher risk
categories of commercial real estate and multi-family mortgage 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 the 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.
Average Balance Sheets and Interest Rates
The following table sets forth certain information relating to the Bank for the
years ended December 31, 1998, 1997 and 1996. 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 years shown. Average balances are derived from average daily balances. The
yields and costs include fees which are considered adjustments to yields.
Year ended December 31,
1998 1997
------------------------------------ ------------------------------------
Average Average
Average yield/ Average yield/
balance Interest(1) Cost balance Interest(1) Cost
---------- ----------- ------- ----------- ----------- --------
(Dollars in thousands)
Assets:
Interest-earning assets:
Short-term investments................ $ 38,585 $ 2,104 5.45% $ 9,657 $ 522 5.41%
Debt securities (2)................... 204,489 12,109 5.92 147,282 8,873 6.02
Equity securities (2)................. 33,196 1,221 3.68 26,255 1,196 4.56
Mortgage loans (3)(4)................. 493,737 42,743 8.66 441,625 39,648 8.98
Money market loan participations...... 39,520 2,239 5.67 43,631 2,491 5.71
Other commercial loans (3)............ 7,495 647 8.63 6,201 625 10.08
Consumer loans (3).................... 1,680 167 9.94 1,176 122 10.37
---------- -------- ----------- --------
Total interest-earning assets...... 818,702 61,230 7.48 675,827 53,477 7.91
-------- ------ -------- -------
Allowance for loan losses................ (12,613) (12,428)
Non-interest earning assets.............. 17,519 15,419
---------- -----------
Total assets....................... $ 823,608 $ 678,818
========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
NOW accounts....................... $ 39,766 617 1.55% $ 37,544 645 1.72%
Savings accounts (5)............... 14,510 356 2.45 15,063 377 2.50
Money market savings accounts...... 164,134 6,350 3.87 158,578 6,109 3.85
Certificate of deposit accounts.... 246,970 13,601 5.51 260,893 14,569 5.58
---------- -------- ----------- --------
Total deposits.................. 465,380 20,924 4.50 472,078 21,700 4.60
Borrowed funds........................ 78,295 4,961 6.34 63,771 4,158 6.52
---------- -------- ----------- --------
Total deposits and borrowed funds 543,675 25,885 4.76 535,849 25,858 4.83
Stock offering proceeds 11,000 275 2.50 -- -- --
---------- -------- ----------- --------
Total interest-bearing liabilities 554,675 26,160 4.72 535,849 25,858 4.83
-------- ------ -------- -------
Non-interest-bearing demand
checking accounts.................... 11,908 9,890
Other liabilities........................ 14,075 10,343
---------- -----------
Total liabilities............... 580,658 556,082
Stockholders' equity..................... 242,950 122,736
---------- -----------
Total liabilities and
stockholders' equity........ $ 823,608 $ 678,818
========== ===========
Net interest income (tax equivalent
basis)/interest rate spread (6)....... 35,070 2.76% 27,619 3.08%
===== =====
Less adjustment of tax exempt income..... 255 260
-------- --------
Net interest income (4).................. $ 34,815 $ 27,359
======== ========
Net interest margin (7).................. 4.28% 4.09%
===== =====
1996
------------------------------------
Average
Average yield/
balance Interest(1) Cost
---------- ----------- --------
(Dollars in thousands)
Assets:
Interest-earning assets:
Short-term investments................ $ 14,562 $ 765 5.25%
Debt securities (2)................... 135,039 8,115 6.01
Equity securities (2)................. 21,746 1,142 5.25
Mortgage loans (3)(4)................. 415,054 37,765 9.10
Money market loan participations...... 54,076 3,007 5.56
Other commercial loans (3)............ 3,792 345 9.10
Consumer loans (3).................... 1,098 134 12.20
---------- --------
Total interest-earning assets...... 645,367 51,273 7.94
-------- -----
Allowance for loan losses................ (12,319)
Non-interest earning assets.............. 15,863
----------
Total assets....................... $ 648,911
==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
NOW accounts....................... $ 37,095 641 1.73%
Savings accounts (5)............... 17,302 426 2.46
Money market savings accounts...... 154,541 5,957 3.85
Certificate of deposit accounts.... 262,007 14,751 5.63
---------- --------
Total deposits.................. 470,945 21,775 4.62
Borrowed funds........................ 55,497 3,683 6.64
---------- --------
Total deposits and borrowed funds 526,442 25,458 4.84
Stock offering proceeds -- -- --
---------- --------
Total interest-bearing liabilities 526,442 25,458 4.84
-------- -----
Non-interest-bearing demand
checking accounts.................... 9,595
Other liabilities........................ 5,808
----------
Total liabilities............... 541,845
Stockholders' equity..................... 107,066
----------
Total liabilities and
stockholders' equity........ $ 648,911
==========
Net interest income (tax equivalent
basis)/interest rate spread (6)....... 25,815 3.10%
=====
Less adjustment of tax exempt income..... 254
--------
Net interest income (4).................. $ 25,561
========
Net interest margin (7).................. 4.00%
=====
- - --------------------
(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 the average balance.
(4) Excluded from interest income for the years ended December 31, 1998 and
1997 is $444 and $908, respectively, collected from borrowers whose loans
were on non-accrual and which relates to interest earned in periods prior
to January 1, 1998 and 1997, respectively.
(5) Savings accounts include interest-bearing mortgagors' escrow accounts.
(6) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(7) Net interest margin represents net interest income (tax equivalent basis)
divided by average interest-earning assets.
Interest Rate Spread. Interest rate spread (the difference between yields
earned on interest-earning assets and rates paid on interest-bearing
liabilities) declined from 3.10% in 1996 to 3.08% in 1997 and 2.76% in 1998. The
more significant reduction in 1998 resulted from the mix of interest-earnings
assets and a falling interest rate environment. Because of the impracticality of
rapidly using the Offering proceeds to originate loans, a larger percent of
earning assets were placed in short-term investments and other debt obligations
in 1998 compared to 1997. A lower interest rate and flat yield curve environment
in 1998 resulted in reduced yields on investment purchases, on new loan
originations and on existing loans that were refinanced by borrowers seeking to
reduce their carrying costs.
Net Interest Margin. Net interest margin, which represents net interest
income (on a tax equivalent basis), divided by interest-earning assets,
increased from 4.00% in 1996 to 4.09% in 1997 and 4.28% in 1998. Despite reduced
interest rate spreads, net interest margin climbed higher in 1997 and 1998 as a
result of a greater percent of interest-earnings assets being funded by
cost-free stockholders' equity (16.6% in 1996 compared to 18.2% in 1997 and
29.7% in 1998). Investment of the Offering proceeds caused much of the 1998
increase. Despite this favorable trend, net interest margin (on an annualized
basis) declined to 4.26% in the fourth quarter of 1998 from 4.38% in the third
quarter and 4.39% in the second quarter of 1998. The lower interest rate and
flat yield curve environment referred to in the preceding paragraph caused most
of the decline. Continuation of such an environment in 1999 will likely result
in further reduction of the Company's net interest margin.
Rate/Volume Analysis
The following table presents, on a tax equivalent basis, the extent to which
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected the Bank's interest income and
interest expense during the years indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
Year ended Year ended
December 31, 1998 December 31, 1997
compared to compared to
year ended year ended
December 31, 1997 December 31, 1996
-------------------------------- -----------------------------------
Increase (decrease) Increase (decrease)
due to due to
-------------------------------- -----------------------------------
Volume Rate Net Volume Rate Net
--------- -------- -------- -------- -------- ------
(In thousands)
Interest income:
Short-term investments................ $ 1,577 $ 5 $ 1,582 $ (265) $ 22 $ (243)
Debt securities....................... 3,390 (154) 3,236 738 20 758
Equity securities..................... 281 (256) 25 218 (164) 54
Mortgage loans........................ 4,550 (1,455) 3,095 2,391 (508) 1,883
Money market loan participations...... (233) (19) (252) (594) 78 (516)
Other commercial loans................ 119 (97) 22 239 41 280
Consumer loans........................ 50 (5) 45 9 (21) (12)
------- -------- -------- -------- -------- ------
Total interest income.............. 9,734 (1,981) 7,753 2,736 (532) 2,204
------- -------- -------- -------- -------- ------
Interest expense:
Deposits:
NOW accounts....................... 37 (65) (28) 8 (4) 4
Savings accounts................... (14) (7) (21) (56) 7 (49)
Money market savings accounts...... 215 26 241 156 (4) 152
Certificate of deposit accounts.... (769) (199) (968) (63) (119) (182)
------- -------- -------- -------- -------- ------
Total deposits.................. (531) (245) (776) 45 (120) (75)
Borrowed funds........................ 923 (120) 803 541 (66) 475
Stock offering proceeds............... 275 -- 275 -- -- --
------- -------- -------- -------- -------- ------
Total interest expense.......... 667 (365) 302 586 (186) 400
------- -------- -------- -------- -------- ------
Net change in net interest income........ $ 9,067 $ (1,616) $ 7,451 $ 2,150 $ (346) $1,804
======= ======== ======== ======== ======== ======
Quantitative and Qualitative Disclosure About Market Risk
Market risk is the risk of loss from adverse changes in market prices and/or
interest rates. Since net interest income (the differential or spread between
the interest earned on loans and investments and the interest paid on deposits
and borrowings) is the Company's primary source of revenue, interest rate risk
is the most significant non-credit related market risk to which to Company is
exposed. Net interest income is affected by changes in interest rates as well as
fluctuations in the level and duration of the Company's assets and liabilities.
Interest rate risk is the exposure of the Company's net interest income to
adverse movements in interest rates. In addition to directly impacting net
interest income, changes in interest rates can also affect the amount of new
loan originations, the ability of borrowers to repay variable rate loans, the
volume of loan prepayments and refinancings, the carrying value of investment
securities classified as available for sale and the flow and mix of deposits.
The Company's Asset/Liability Committee, comprised of several members of senior
management, is responsible for managing interest rate risk in accordance with
policies approved by the Board of Directors regarding acceptable levels of
interest rate risk, liquidity and capital. The Committee reviews with the Board
of Directors on a quarterly basis its activities and strategies, the effect of
those strategies on the Company's operating results, the Company's interest rate
risk position and the effect subsequent changes in interest rates could have on
the Company's future net interest income. The Committee is actively involved in
the planning and budgeting process as well as in the setting of pricing for the
Company's loan and deposit products.
The Committee manages interest rate risk through use of both earnings simulation
and GAP analysis. Earnings simulation is based on actual cash flows and
assumptions of management about future changes in interest rates and levels of
activity (loan originations, loan prepayments and deposit flows). The
assumptions are inherently uncertain and, therefore, actual results will differ
from simulated results due to timing, magnitude and frequency of interest rate
changes as well as changes in market conditions and strategies. The net interest
income projection resulting from use of actual cash flows and management's
assumptions ("Base Case") is compared to net interest income projections based
on an immediate shift of 200 basis points upward or downward in the first year
of the model ("Interest Rate Shock"). The following table indicates the
estimated impact on net interest income over a one year period under scenarios
of a 200 basis point change upward or downward as a percentage of Base Case
earnings projections.
Estimated Percentage Change
Changes in Interest Rates (Basis Points) in Future Net Interest Income
---------------------------------------- ------------------------------
+200 over one year.............. (3.18)%
Base Case...................... --
-200 over one year.............. (2.81)%
The Company's interest rate risk policy states that an immediate 200 basis point
change upward or downward should not negatively impact estimated net interest
income over a one year period by more than 15%.
The results shown above are based on the assumption that there are no
significant changes in the Company's operating environment and that interest
rates will decrease modestly and gradually over the next year. Further, in the
case of the 200 basis point downward adjustment, it was assumed that it would
not be possible to reduce the rates paid on certain deposit accounts by 200
basis points. Instead, it was assumed that NOW accounts would be reduced by 50
basis points, savings accounts by 75 basis points and money market savings
accounts by 138 basis points. There can be no assurance that the assumptions
used will be validated in 1999.
GAP analysis measures the difference between the assets and liabilities
repricing or maturing within specific time periods. An asset-sensitive position
indicates that there are more rate-sensitive assets than rate-sensitive
liabilities repricing or maturing within specific time horizons, which would
generally imply a favorable impact on net interest income in periods of rising
interest rates and a negative impact in periods of falling rates. A
liability-sensitive position would generally imply a negative impact on net
interest income in periods of rising rates and a positive impact in periods of
falling rates. GAP analysis has limitations because it cannot measure the effect
of interest rate movements and competitive pressures on the repricing and
maturity characteristics of interest-earning assets and interest-bearing
liabilities.
The table below shows the Company's interest rate sensitivity gap position as of
December 31, 1998. NOW accounts, savings accounts and money market savings
accounts are immediately withdrawable and the rates paid on such accounts can be
changed at any time. Accordingly, they are included in the one year or less
period even though management considers it unlikely that such deposits will be
immediately withdrawn.
At December 31, 1998
---------------------------------------------------------------------------------------
More More More
More More than than than
than one than two three four five
One year to years to years years years
year two three to four to five to ten
or less years years years years years
---------- --------- ---------- --------- --------- ----------
(Dollars in thousands)
Interest-earning assets(1):
Short-term investments........... $ 22,660 $ -- $ -- $ -- $ -- $ --
Weighted average rate........... 4.75%
Debt and equity securities(2).... 99,458 97,836 22,173 6,352 840 397
Weighted average rate........... 5.93% 5.70% 5.65% 6.14% 5.75% 7.22%
Mortgage loans(3)................ 200,065 77,782 54,959 68,463 72,174 61,639
Weighted average rate........... 8.07% 7.86% 7.83% 8.10% 8.13% 7.93%
Money market loan participations 44,300 -- -- -- -- --
Weighted average rate........... 5.53%
Other loans...................... 5,254 686 2,317 1,223 702 119
Weighted average rate........... 8.77% 9.20% 8.71% 8.71% 8.63% 8.77%
--------- --------- ---------- --------- --------- ---------
Total interest-earning assets.... 371,737 176,304 79,449 76,038 73,716 62,155
Weighted average rate........... 7.00% 6.67% 7.25% 7.95% 8.11% 7.93%
--------- --------- ---------- --------- --------- ---------
Interest-bearing liabilities:
NOW accounts..................... 42,950 -- -- -- -- --
Weighted average rate........... 1.50%
Saving Accounts (4).............. 13,144 -- -- -- -- --
Weighted average rate........... 2.50%
Money Market savings accounts.... 173,173 -- -- -- -- --
Weighted average rate........... 3.89%
Certificate of deposit........... 194,628 31,737 12,197 5,705 3,787 --
Weighted average rate........... 5.22% 6.03% 5.77% 6.15% 5.70%
Borrowed funds................... 11,550 9,400 9,350 15,300 30,750 18,000
Weighted average rate........... 6.79% 6.24% 6.66% 6.32% 5.29% 6.06%
--------- --------- ---------- --------- --------- ---------
Total interest-bearing liabilities 435,445 41,137 21,547 21,005 34,537 18,000
Weighted average rate........... 4.28% 6.08% 6.16% 6.27% 5.33% 6.06%
--------- --------- ---------- --------- --------- ---------
Interest sensitivity gap(5)......... (63,708) 135,167 57,902 55,033 39,179 44,155
Impact of interest rate swap........ 5,000 -- -- -- -- (5,000)
Weighted average rate........... 5.34% 5.94%
--------- --------- ---------- --------- --------- ---------
Adjusted interest sensitivity gap... $ (58,708) $ 135,167 $ 57,902 $ 55,033 $ 39,179 $ 39,155
========= ========= ========== ========= ========= =========
Cumulative interest sensitivity gap. $ (58,708) $ 76,459 $ 134,361 $ 189,394 $ 228,573 $ 267,728
========= ========= ========== ========= ========= =========
Cumulative interest sensitivity gap
as a percentage of total assets.. (6.68)% 8.70% 15.29% 21.55% 26.00% 30.46%
Cumulative interest sensitivity
gap as a percentage of total
interest-earning assets.......... (6.95)% 9.05% 15.91% 22.42% 27.06% 31.70%
More
than
ten years Total
---------- ---------
(Dollars in thousands)
Interest-earning assets(1):
Short-term investments........... $ -- $ 22,660
Weighted average rate...........
Debt and equity securities(2).... 720 227,776
Weighted average rate........... 8.08%
Mortgage loans(3)................ 4,457 539,539
Weighted average rate........... 8.48%
Money market loan participations -- 44,300
Weighted average rate...........
Other loans...................... -- 10,301
Weighted average rate...........
--------- ---------
Total interest-earning assets.... 5,177 844,576
Weighted average rate........... 8.42%
--------- ---------
Interest-bearing liabilities:
NOW accounts..................... -- 42,950
Weighted average rate...........
Savings accounts (4)............. -- 13,144
Weighted average rate...........
Money Market savings accounts.... -- 173,173
Weighted average rate...........
Certificate of deposit........... -- 248,054
Weighted average rate...........
Borrowed funds................... -- 94,350
Weighted average rate...........
--------- ---------
Total interest-bearing liabilities -- 571,671
Weighted average rate...........
--------- ---------
Interest sensitivity gap(5)......... 5,177 272,905
Impact of interest rate swap........ -- --
Weighted average rate...........
--------- ---------
Adjusted interest sensitivity gap... $ 5,177 $ 272,905
========= =========
Cumulative interest sensitivity gap. $ 272,905
=========
Cumulative interest sensitivity gap
as a percentage of total assets.. 31.05%
Cumulative interest sensitivity
gap as a percentage of total
interest-earning assets.......... 32.31%
- - -----------------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) Debt and equity securities include all debt securities and $4 million of
auction rate preferred stock, the maturities of which have been assumed to
be the date on which they are next auctioned. All other marketable equity
securities and restricted equity securities are excluded.
(3) For purposes of the gap analysis, the allowance for loan losses, deferred
loan fees, unearned discounts and non-performing loans have been excluded.
(4) Savings accounts include interest-bearing mortgagors' escrow accounts.
(5) Interest sensitivity gap represents the difference between interest-earning
assets and interest-bearing liabilities.
The Company's cumulative interest sensitivity gap of assets and liabilities with
expected maturities of more than five years grew from approximately $9.7
million, or 1.4% of total assets, at December 31, 1997 to $44.3 million, or 5.0%
of total assets, at December 31, 1998. The increase resulted from having a
significant part of the Company's loan originations and refinancings (notably in
the second half of the year) underwritten at fixed rates for periods of five
years or more. A lower interest rate environment prompted borrowers to seek
fixed rate rather than adjustable rate financing. Competitive market factors
precluded the Company from making adjustable rate loans. While the amount of
added interest rate risk from fixed rate loans originated in 1998 is within
tolerable limits, management recognizes that continuation of fixed rate loan
production increasingly exposes the Company's earnings to changes in the
interest rate environment. Further use of fixed rate borrowings from the FHLB
for extended periods of time and swap agreements will be considered by
management to mitigate interest rate risk if market conditions so warrant.
Other Market Risks. Included in the Company's investment portfolio at
December 31, 1998 are equity securities with a market value of $30.6 million.
Included in that amount are net unrealized gains of $22.7 million. Movements in
the market price of securities may affect the amount of gains or losses
ultimately realized by the Company from the sale of its equity securities.
Comparison of Operating Results For the Years Ended December 31, 1998 and
December 31, 1997
General. Net income for the year ended December 31, 1998 was $19.2 million,
an increase of $5.4 million, or 39.5%, as compared to $13.7 million for the year
ended December 31, 1997. The increase was attributable primarily to higher net
interest income of $7.0 million and $2.8 million more in gains from sales of
securities, partially offset by $3.5 million more in income tax expense,
$300,000 in provision for loan losses and $641,000 in higher compensation and
employee benefits expense. Much of the increase in net interest income resulted
from investment of the $134.8 million of net proceeds from the sale of stock in
March 1998 and growth in the loan portfolio.
Interest Income. Interest income for the year ended December 31, 1998 was
$61.4 million compared to $54.1 million for the year ended December 31, 1997, an
increase of $7.3 million, or 13.5%. A 21.1% growth in average interest-earning
assets from $675.8 million in 1997 to $818.7 million in 1998 contributed $9.7
million of additional interest income. Partially offsetting this amount was a
$2.0 million reduction in interest income resulting from a 43 basis point
decline in the average yield on interest-earning assets from 7.91% in 1997 to
7.48% in 1998. The reduction resulted from the mix of the interest-earning
assets and continuation of a declining interest rate environment. In 1998,
mortgage loans as a percent of total interest-earning assets declined to 60%
compared to 65% in 1997, despite a $52.1 million, or 11.8%, increase in average
mortgage loans outstanding between the two years. The average yield on mortgage
loans declined from 8.98% in 1997 to 8.66% in 1998 as new loans were originated
and borrowers refinanced existing loans at lower rates. Three downward
adjustments of 25 basis points each by the Federal Reserve Board in the fourth
quarter of 1998 reduced interest income from loans tied to a prime rate index by
approximately $125,000. These rate adjustments will cause a reduction in
interest income in 1999 on approximately $82 million of mortgage loans tied to
prime. Average balances of short-term investments and other debt obligations
were $82.0 million, or 40.9%, higher in 1998 than in 1997 as a result of
investment of the net proceeds from the sale of stock. Management will seek to
reduce the percent of assets maintained in these categories by emphasizing
growth of the loan portfolio. Achievement of this objective will depend greatly
on continuation of favorable economic trends.
Interest Expense. Interest expense for the year ended December 31,
1998 was $26.2 million compared to $25.9 million for the year ended December 31,
1997, an increase of $302,000, or 1.2%. Interest paid on deposits (excluding
interest paid in connection with the stock offering) was $776,000, or 3.6% less
in 1998 than in 1997 as a result of a $6.7 million, or 1.4%, decline in the
average balance of deposits and a 10 basis point decline (from 4.60% to 4.50%)
in the average rate paid on deposits. Part of the decline in deposits resulted
from withdrawals by eligible depositors to pay for stock purchased in the stock
offering. The average balance of stock offering proceeds in 1998 on which the
Company paid interest at an annual rate of 2.50% was $11.0 million. The Company
increased
its average borrowings from the FHLB from $63.8 million in 1997 to $78.3 million
in 1998 as part of its management of interest rate risk resulting from the
origination and refinancing of multi-family and commercial real estate mortgage
loans at fixed rates for certain time intervals. Partially offsetting the added
cost resulting from increased borrowings was a reduction in the average rate
paid on borrowed funds from 6.52% in 1997 to 6.34% in 1998.
Provision for Loan Losses. The Company provided $300,000 for loan losses in
1998 compared to none in 1997. As previously discussed, the provision was made
in light of the significant growth in the higher risk categories of the loan
portfolio.
Non-Interest Income. Non-interest income increased from $1.2 million for
the year ended December 31, 1997 to $4.2 million for the year ended December 31,
1998, primarily as a result of greater gains from sales of marketable equity
securities ($2.8 million in 1998 and $74,000 in 1997). The remainder of
non-interest income is comprised of service fees and charges and net income from
other real estate owned activity. Such sources of income increased by $271,000
in 1998 compared to 1997 primarily as a result of higher loan prepayment and
penalty fees.
Non-Interest Expense. Non-interest expense increased by $807,000, or 9.6%,
from $8.4 million for the year ended December 31, 1997 to $9.2 million for the
year ended December 31, 1998. Of this increase, $641,000 related to compensation
and employee benefits, which rose 12.6% to $5.7 million in 1998. Adoption of an
ESOP resulted in $291,000 of expense in 1998 compared to none in 1997. The
remainder of the increase in compensation and employee benefits was attributable
primarily to the hiring of additional loan officers, a residential mortgage loan
originator and other personnel. Equipment and data processing expense increased
from $1.1 million in 1997 to $1.2 million in 1998 primarily as a result of
$130,000 of expense incurred in 1998 (none in 1997) in connection with the
Company's efforts to address Year 2000 compliance issues. In 1997, data
processing expense was higher as a result of conversion to a new data processing
service bureau computer system. Advertising and marketing expenses increased by
$72,000, or 21.3%, in 1998 compared to 1997 as the Company expanded promotion of
its products and services and incurred higher annual financial report costs.
Other operating expenses remained stable in 1998 in comparison to 1997.
Income Taxes. Total income tax expense for the year ended December 31, 1998
was $10.8 million compared to $7.3 million for the year ended December 31, 1997,
resulting in effective tax rates of 36.1% and 34.8% for the respective years.
The Company paid a lower federal tax rate in 1997 because its taxable earnings
for the tax year ended October 31, 1997 were below the threshold at which the
maximum federal rate had to be applied. The rate of state income taxes was low
in both years because of the utilization of a real estate investment trust
subsidiary and investment security subsidiaries.
Comparison of Operating Results For the Years Ended December 31, 1997 and
December 31, 1996
General. Net income for the year ended December 31, 1997 was $13.7 million,
an increase of $1.8 million, or 15.0%, as compared to $11.9 million for the year
ended December 31, 1996. The increase was attributable to higher net interest
income of $2.7 million and a $424,000 decrease in income tax expense resulting
from a lower effective income tax rate, partially offset by a $661,000 increase
in non-interest expense due to higher operating costs and a $675,000 decline in
non-interest income due in part to $390,000 less in gains from sales of
securities. The increase in net interest income was due primarily to growth in
average interest-earning assets and receipt of $908,000 in interest from a
borrower whose loans were on non-accrual and which related to interest earned in
periods prior to 1997.
Interest Income. Interest income for the year ended December 31,1997 was
$54.1 million compared to $51.0 million for the year ended December 31, 1996, an
increase of $3.1 million, or 6.1%. Excluding the receipt of $908,000 in interest
income referred to in the preceding paragraph, the rate of increase over the
prior year was 4.3%. Subsequent comments on income from lending activities in
1997 exclude the effect of the $908,000. Substantially all of the increase in
interest income resulted from growth in average interest-earning assets of $30.5
million, or 4.7%. The principal areas of growth related to mortgage loans (up
$26.6 million, or 6.4%) and debt
securities (up $12.2 million, or 9.1%). Most of the mortgage loan growth
resulted from originations of one-to-four family, multi-family and commercial
real estate loans. The increase in debt securities resulted from a decision to
shift some of the Bank's liquid funds placed in short-term investments and money
market loan participations into debt securities so as to improve asset yield.
Interest Expense. Interest expense for the year ended December 31, 1997 was
$25.9 million compared to $25.5 million for the year ended December 31, 1996, an
increase of $400,000, or 1.6%. This increase resulted primarily from a higher
average balance of interest-bearing liabilities ($9.4 million, or 1.8%) as the
average rate paid on such liabilities declined by 1 basis point. Average
interest-bearing deposit balances increased modestly ($1.1 million, or 0.2%) as
a continued low rate environment made it difficult to attract deposits. The Bank
increased its borrowings from the FHLB as part of its management of interest
rate risk resulting from the origination and refinancing of multi-family and
commercial real estate mortgage loans at fixed rates for certain time intervals.
Interest expense on borrowed funds increased $475,000, or 12.9%, for the year
ended December 31, 1997 due to an $8.3 million, or 14.9%, increase in the
average balance of such funds to $63.8 million, which was partially offset by a
12 basis point reduction in the average rate paid on borrowed funds to 6.52% in
1997 compared to 6.64% in1996.
Provision for Loan Losses. The Bank did not provide for loan losses in 1997
and 1996 based on continuation of favorable trends in the various factors
considered by management in evaluating the adequacy of the Bank's allowance for
loan losses. Non-performing loans amounted to $803,000, or 0.16%, of total loans
at December 31, 1997 and $1.3 million, or 0.28%, at December 31, 1996. At those
respective dates, the allowance for loan losses was $12.5 million and $12.3
million, or 2.51% and 2.56% of total loans outstanding.
Non-Interest Income. Non-interest income is comprised of fees and charges
for Bank services, gains or losses from sales of assets, other real estate owned
activity and other income resulting from miscellaneous transactions. Total
non-interest income was $1.2 million for the year ended December 31, 1997
compared to $1.9 million for the year ended December 31, 1996, a decrease of
$675,000, or 36.7%. The decrease resulted primarily from a $165,000 reduction in
Bank fees and services, less gains from sales of marketable equity securities
($74,000 in 1997 compared to $464,000 in 1996) and a $61,000 reduction in income
from other real estate owned activities. The decrease in Bank fees and services
resulted primarily from less fees from loan prepayments and late payments.
Non-Interest Expense. Non-interest expense increased by $661,000, or 8.6%,
from $7.7 million for the year ended December 31, 1996 to $8.4 million for the
year ended December 31, 1997. Of this increase, $568,000 related to compensation
and employee benefits, which rose 12.6% to $5.1 million for the year ended
December 31, 1997. The higher level of compensation and employee benefits was
attributable to several factors: the addition of a chief financial officer and
another commercial loan officer, increased use of temporary personnel from an
outside agency because of personnel turnover, increased accruals for
supplemental executive retirement costs and bonuses, a one-time charge for
compensation-related costs pertaining to the creation of a real estate
investment trust, increased personnel benefit costs and increased personnel
training in connection with conversion to a new computer system.
Occupancy expense increased $74,000, or 11.8 %, to $701,000 for the year
ended December 31, 1997 as a result of branch lease renewals at higher annual
rental charges and the cost of refurbishings at the main office of the Bank.
Equipment and data processing expense increased from $940,000 in 1996 to $1.1
million in 1997 primarily as a result of higher depreciation expense on new
equipment put into use in connection with the Bank's conversion to a data
processing service bureau computer system. Other operating expense categories
did not change significantly between 1997 and 1996 except for an increase of
$60,000 in FDIC deposit insurance premiums and a decrease of $126,000 in
professional fees for legal and advisory services.
Income Taxes. Total income tax expense for the year ended December 31, 1997
was $7.3 million compared to $7.8 million for the year ended December 31, 1996,
resulting in effective tax rates of 34.8% and 39.4% for the respective years.
The lower effective tax rate resulted from creation of a real estate investment
trust and continued utilization of a securities investment subsidiary to
substantially reduce state income taxes. The rate of federal income tax is
slightly less than the statutory rate as a result of the exemption of part of
the Bank's dividend income on equity securities from taxable income.
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 Bank 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 year ended December 31, 1998, the Company repaid
advances of $24.9 million and obtained new advances of $50.0 million. Total
advances outstanding at December 31, 1998 amounted to $94.4 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 December 31, 1998, such assets amounted to $98.6
million, or 11.2% of total assets.
At December 31,1998, the Company and the Bank exceeded all regulatory capital
requirements. The Bank's Tier I capital was $204.0 million, or 25.9% of adjusted
assets. The minimum required Tier I capital ratio is 4.00%.
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 calender
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 has been 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 will continue 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.
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 substantially completed. Satisfactory responses have
been received from most of the Company's vendors.
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. Most of the testing and corrections has taken
place. This step is substantially completed. The monitoring of certain non-IT
vendors will continue into 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 is substantially completed. Contingency plans for how the
Company would resume business if unanticipated problems arise from
non-performance by IT and non- IT vendors is in the process of being addressed.
Such plans are expected to be completed in the first quarter of 1999.
* * * * *
The Company's efforts to become Y2K compliant are being monitored by its banking
regulators. Failure to be Y2K compliant could subject the Company to formal
supervisory or enforcement actions.
The Company expensed $130,000 during the year ended December 31, 1998 and
expects to incur a lesser amount of costs in 1999 to become Y2K compliant. The
Company presently believes the Y2K issue will not pose significant operating
problems for the Company. However, if implementation and testing plans are not
completed in a satisfactory and timely manner, in particular by third parties on
which the Company is dependent, or other unforeseen problems arise, the Y2K
issue could have a material adverse effect on the operations of the Company.
New Accounting Pronouncements
See note 1 to the consolidated financial statements for information concerning
new accounting pronouncements. It is not anticipated that such pronouncements
will have a significant impact on the Company's financial position or results of
operations.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Brookline Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of
Brookline Bancorp, Inc. and subsidiaries (the Company) as of December 31, 1998
and 1997, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Brookline Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Boston, Massachusetts
January 19, 1999
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
---------------------------------
1998 1997
------------- ------------
ASSETS
Cash and due from banks.................................................. $ 6,657 $ 8,843
Short-term investments................................................... 22,660 11,670
Securities available for sale............................................ 133,529 117,637
Securities held to maturity (market value of $122,043
and $65,600, respectively)............................................ 121,390 65,444
Restricted equity securities............................................. 5,174 3,721
Loans, excluding money market loan participations........................ 548,558 472,412
Money market loan participations......................................... 44,300 24,000
Allowance for loan losses................................................ (13,094) (12,463)
------------ -----------
Net loans.......................................................... 579,764 483,949
------------ -----------
Accrued interest receivable.............................................. 6,457 5,240
Bank premises and equipment, net......................................... 1,184 1,361
Other real estate owned, net............................................. 1,940 2,373
Other assets............................................................. 272 881
------------ -----------
Total assets....................................................... $ 879,027 $ 701,119
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits................................................................. $ 489,370 $ 482,304
Borrowed funds........................................................... 94,350 69,265
Mortgagors' escrow accounts.............................................. 3,308 2,896
Income taxes payable..................................................... 5,843 5,901
Deferred income tax liability, net....................................... 2,045 2,041
Accrued expenses and other liabilities................................... 5,889 5,955
------------ -----------
Total liabilities.................................................. 600,805 568,362
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
none issued........................................................ -- --
Common stock, $.01 par value; 45,000,000 shares authorized,
29,095,000 shares issued........................................... 291 --
Additional paid-in capital............................................ 134,490 --
Retained earnings..................................................... 135,282 119,018
Accumulated other comprehensive income................................ 14,416 13,739
Treasury stock, at cost - 113,500 shares and
none, respectively................................................. (1,316) --
Unallocated common stock held by ESOP - 386,457 shares
and none, respectively............................................. (4,941) --
------------ -----------
Total stockholders' equity...................................... 278,222 132,757
------------ -----------
Total liabilities and stockholders' equity...................... $ 879,027 $ 701,119
============ ===========
See accompanying notes to the consolidated financial statements.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Year ended December 31,
---------------------------------------------------
1998 1997 1996
---------- ----------- ----------
Interest income:
Loans, excluding money market loan participations.............. $ 44,001 $ 41,303 $ 38,245
Money market loan participations............................... 2,239 2,491 3,006
Debt securities................................................ 12,109 8,873 8,115
Marketable equity securities................................... 695 715 697
Restricted equity securities................................... 271 220 191
Short-term investments......................................... 2,104 523 765
---------- ----------- ----------
Total interest income....................................... 61,419 54,125 51,019
---------- ----------- ----------
Interest expense:
Deposits....................................................... 21,199 21,700 21,775
Borrowed funds................................................. 4,961 4,158 3,683
---------- ----------- ----------
Total interest expense ..................................... 26,160 25,858 25,458
---------- ----------- ----------
Net interest income............................................... 35,259 28,267 25,561
Provision for loan losses......................................... 300 -- --
---------- ----------- ----------
Net interest income after provision for loan losses......... 34,959 28,267 25,561
---------- ----------- ----------
Non-interest income:
Fees and charges............................................... 1,095 792 957
Gains on sales of securities, net.............................. 2,843 74 464
Other real estate owned income, net............................ 251 238 299
Other income................................................... 16 61 120
---------- ----------- ----------
Total non-interest income................................... 4,205 1,165 1,840
---------- ----------- ----------
Non-interest expense:
Compensation and employee benefits............................. 5,722 5,081 4,513
Occupancy...................................................... 694 701 627
Equipment and data processing.................................. 1,186 1,116 940
Advertising and marketing...................................... 410 338 319
Deposit insurance premiums..................................... 70 71 11
Other.......................................................... 1,099 1,067 1,303
---------- ----------- ----------
Total non-interest expense.................................. 9,181 8,374 7,713
---------- ----------- ----------
Income before income taxes........................................ 29,983 21,058 19,688
Provision for income taxes........................................ 10,831 7,327 7,751
---------- ----------- ----------
Net income.................................................. $ 19,152 $ 13,731 $ 11,937
========== =========== ==========
Basic and diluted earnings per share.............................. NM -- --
Weighted average common shares outstanding - basic
and diluted................................................. NM -- --
See accompanying notes to the consolidated financial statements.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Year ended December 31,
---------------------------------------------------
1998 1997 1996
---------- ----------- ----------
Net income........................................................... $ 19,152 $ 13,731 $ 11,937
---------- ----------- ----------
Other comprehensive income, net of taxes:
Unrealized holding gains.......................................... 4,007 8,424 2,702
Income tax expense................................................ 1,617 3,297 961
---------- ----------- ----------
Net unrealized holding gains................................... 2,390 5,127 1,741
---------- ----------- ----------
Less reclassification adjustment for gains included in net income:
Realized gains.................................................... 2,843 74 464
Income tax expense................................................ 1,130 26 150
---------- ----------- ----------
Net reclassification adjustment................................ 1,713 48 314
---------- ----------- ----------
Total other comprehensive income............................... 677 5,079 1,427
---------- ----------- ----------
Comprehensive income................................................. $ 19,829 $ 18,810 $ 13,364
========== =========== ==========
See accompanying notes to the consolidated financial statements.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(In thousands)
Accumulated
Additional other
Common paid-in Retained comprehensive Treasury
stock capital earnings income stock
---------- ---------- ------------ ----------------- -------------
Balance at December 31, 1995............ $ -- $ -- $ 93,350 $ 7,233 $ --
Net income.............................. -- -- 11,937 -- --
Unrealized gain on securities
available for sale, net of
reclassification adjustment.......... -- -- -- 1,427 --
---------- ----------- ----------- ---------- ----------
Balance at December 31, 1996............ -- -- 105,287 8,660 --
Net income.............................. -- -- 13,731 -- --
Unrealized gain on securities
available for sale, net of
reclassification adjustment.......... -- -- -- 5,079 --
---------- ----------- ----------- ---------- ----------
Balance at December 31, 1997............ -- -- 119,018 13,739 --
Net income.............................. -- -- 19,152 -- --
Unrealized gain on securities
available for sale, net of
reclassification adjustment.......... -- -- -- 677 --
Net proceeds of stock offering
and issuance of common
stock (29,095,000 shares)............ 291 134,499 -- -- --
Common stock dividend
of $0.10 per share................... -- -- (2,888) -- --
Treasury stock purchases
(113,500 shares)..................... -- -- -- -- (1,316)
Common stock acquired by
ESOP (407,600 shares)................ -- -- -- -- --
Common stock held by ESOP
committed to be released
(21,143 shares)...................... -- (9) -- -- --
---------- ----------- ----------- ---------- ----------
Balance at December 31, 1998............ $291 $134,490 $135,282 $14,416 $(1,316)
========== =========== =========== ========== ==========
Unallocated
common
stock Total
held by stockholders'
ESOP equity
--------------- --------------
Balance at December 31, 1995............ $ -- $100,583
Net income.............................. -- 11,937
Unrealized gain on securities
available for sale, net of
reclassification adjustment.......... -- 1,427
------------ -----------
Balance at December 31, 1996............ -- 113,947
Net income.............................. -- 13,731
Unrealized gain on securities
available for sale, net of
reclassification adjustment.......... -- 5,079
------------ -----------
Balance at December 31, 1997............ -- 132,757
Net income.............................. -- 19,152
Unrealized gain on securities
available for sale, net of
reclassification adjustment.......... -- 677
Net proceeds of stock offering
and issuance of common
stock (29,095,000 shares)............ -- 134,790
Common stock dividend
of $0.10 per share................... -- (2,888)
Treasury stock purchases
(113,500 shares)..................... -- (1,316)
Common stock acquired by
ESOP (407,600 shares)................ (5,248) (5,248)
Common stock held by ESOP
committed to be released
(21,143 shares)...................... 307 298
------------ -----------
Balance at December 31, 1998............ $(4,941) $278,222
============ ===========
See accompanying notes to the consolidated financial statements.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
-----------------------------------
1998 1997 1996
--------- -------- --------
Cash flows from operating activities:
Net income........................................................... $ 19,152 $ 13,731 $ 11,937
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses...................................... 300 -- --
Depreciation and amortization.................................. 462 450 261
Amortization, net of accretion, of securities premiums
and discounts............................................... 1,021 633 526
Accretion of deferred loan origination fees
and unearned discounts...................................... (529) (592) (619)
Net gains from sales of securities............................. (2,843) (74) (464)
Net gains from sales of other real estate owned................ (22) (12) (149)
Deferred income taxes.......................................... (482) (302) 21
Release of ESOP shares......................................... 298 -- --
(Increase) decrease in:
Accrued interest receivable................................. (1,217) (134) 487
Other assets................................................ 609 (202) 6
Increase (decrease) in:
Income taxes payable........................................ (58) 4,450 (640)
Accrued expenses and other liabilities...................... (66) 1,671 330
--------- -------- --------
Net cash provided by operating activities................ 16,625 19,619 11,696
--------- -------- --------
Cash flows from investing activities:
Proceeds from sales of securities available for sale................. 3,687 752 2,712
Proceeds from redemptions and maturities of securities
available for sale................................................ 47,858 50,956 25,583
Proceeds from redemptions and maturities of securities
held to maturity.................................................. 21,252 21,693 110,400
Purchase of securities available for sale............................ (63,652) (43,651) (61,316)
Purchase of securities held to maturity.............................. (77,998) (46,049) (63,077)
Purchase of Federal Home Loan Bank of Boston stock................... (1,453) (240) (613)
Net increase in loans................................................ (76,977) (45,883) (28,644)
Proceeds from sales of participations in loans....................... 1,691 1,198 5,965
Purchase of bank premises and equipment.............................. (251) (344) (570)
Capital expenditures on other real estate owned...................... (129) (88) (17)
Proceeds from sales of other real estate owned....................... 550 158 1,284
--------- -------- --------
Net cash used for investing activities...................... (145,422) (61,498) (8,293)
--------- -------- --------
(Continued)
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
Year ended December 31,
-----------------------------------
1998 1997 1996
--------- -------- --------
Cash flows from financing activities:
Increase in demand deposits and NOW, savings and
money market savings accounts..................................... 15,097 3,982 8,918
Increase (decrease) in certificates of deposit....................... (8,031) (5,694) 883
Proceeds from Federal Home Loan Bank of Boston advances.............. 49,950 25,792 22,796
Repayment of Federal Home Loan Bank of Boston advances............... (24,865) (17,092) (11,896)
Increase in mortgagors' escrow accounts.............................. 412 119 403
Net proceeds from issuance of common stock........................... 134,790 -- --
Purchase of common stock for ESOP.................................... (5,248) -- --
Purchase of treasury stock........................................... (1,316) -- --
Payment of common stock dividends.................................... (2,888) -- --
--------- -------- --------
Net cash provided by financing activities................ 157,901 7,107 21,104
--------- -------- --------
Net increase (decrease) in cash and cash equivalents.................... 29,104 (34,772) 24,507
Cash and cash equivalents at beginning of period........................ 44,513 79,285 54,778
--------- -------- --------
Cash and cash equivalents at end of period.............................. $ 73,617 $ 44,513 $ 79,285
========= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds........................... $ 26,039 $ 25,813 $ 26,491
Income taxes...................................................... 11,363 3,309 8,361
Non-cash activities:
Transfers from loans to other real estate owned................... -- 728 1,096
See accompanying notes to the consolidated financial statements.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies and Related Matters
As part of a reorganization and stock offering completed on March 24, 1998 and
described more fully in note 2, Brookline Bancorp, Inc. (the "Company") was
formed as a Massachusetts corporation and parent of Brookline Savings Bank (the
"Bank").
The Company operates five full service banking offices located in Brookline,
Massachusetts. Its primary activities include acceptance of deposits from the
general public, origination of mortgage loans on residential and commercial real
estate located principally in Massachusetts, and investment in debt and equity
securities. The Company is subject to competition from other financial and
non-financial institutions and is supervised and regulated by the Board of
Governors of the Federal Reserve System. As a Massachusetts chartered savings
bank whose deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") and the Deposit Insurance Fund ("DIF"), the activities of the Bank are
subject to regulation, supervision and examination by the FDIC, the Office of
the Massachusetts Commissioner of Banks and the DIF.
Principles of Consolidation and Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, the Bank and Brookline Securities Corp. ("BSC").
The Bank includes its wholly-owned subsidiaries, 160 Associates, Inc.
("Associates") and BBS Investment Corporation ("BBS"). BSC and BBS are engaged
in buying, selling and holding investment securities. Associates is engaged in
marketing services at immaterial levels of activity. In 1997, Brookline
Preferred Capital Corporation ("BPCC") was established as a 99.9% owned
subsidiary of Associates. BPCC is a real estate investment trust that owns and
manages real estate mortgage loans originated by the Bank. All significant
intercompany transactions and balances are eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, income and expenses.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the allowance for loan losses.
Certain amounts in the prior years' consolidated financial statements were
reclassified to permit comparison with the current year.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include highly liquid
assets with an original maturity of three months or less. Highly liquid assets
include cash and due from banks, short-term investments and money market loan
participations.
Securities
Marketable equity securities and debt securities are classified as either
trading account securities, held to maturity securities (applicable only to debt
securities) or available for sale securities. Management determines the
classification of securities at the time of purchase.
Trading account securities are carried at estimated fair value with unrealized
gains and losses included in earnings. None of the securities purchased by the
Company have been classified as trading account securities.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Debt securities for which the Company has the positive intent and ability to
hold to maturity are classified as held to maturity and carried at amortized
cost. Those securities held for indefinite periods of time and not intended to
be held to maturity are classified as available for sale. Securities held for
indefinite periods of time include securities that management intends to use as
part of its asset/liability management strategy and that may be sold in response
to changes in interest rates or other business factors. Securities available for
sale are carried at estimated fair value. Unrealized gains (losses), net of
related income taxes, are included in the "accumulated other comprehensive
income" component of stockholders' equity. Restricted equity securities are
carried at cost.
Premiums and discounts on debt securities are amortized to expense and accreted
to income over the estimated life of the respective security using a method
which approximates the interest method. Security transactions are recorded on
the trade date. Realized gains and losses are determined using the specific
identification method. Security valuations are reviewed and evaluated
periodically by management. If the decline in the value of any security is
deemed to be other than temporary, the security is written down to a new cost
basis and the resulting loss is charged to income.
Loans
Loans are reported at the principal amount outstanding, reduced by net deferred
loan origination fees, unearned discounts and unadvanced funds due mortgagors on
uncompleted loans.
Loan origination fees and direct loan origination costs are deferred, and the
net fee or cost is recognized in interest income using the interest method.
Deferred amounts are recognized for fixed rate loans over the contractual life
of the loans and for adjustable rate loans over the period of time required to
adjust the contractual interest rate to a yield approximating a market rate at
origination date.
Accrual of interest on loans is discontinued either when reasonable doubt exists
as to the full timely collection of interest and principal or when a loan
becomes past due 90 days. All interest previously accrued and not collected is
reversed against interest income. Interest payments received on non-accrual and
impaired loans are recognized as income unless further collections are doubtful,
in which case the payments are applied as a reduction of principal. Loans are
generally returned to accrual status when principal and interest payments are
current, full collectibility of principal and interest is reasonably assured and
a consistent record of performance (generally six months) has been achieved.
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect principal or interest due
according to the contractual terms of the loan. Impaired loans are measured and
reported based on one of three methods: the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. If the measure is less than an impaired loan's recorded
investment, an impairment loss is recognized as part of the allowance for loan
losses.
Allowance for Loan Losses
The allowance for loan losses is based on a periodic analysis of the loan
portfolio by management of the amount deemed necessary to adequately provide for
losses in the loan portfolio. Factors considered in making the evaluation
include growth of the loan portfolio, the risk characteristics of the types of
loans in the portfolio, geographic and large borrower concentrations, current
regional economic and real estate market conditions that could affect the
ability of borrowers to pay, the value of underlying collateral, and trends in
loan delinquencies and charge-offs. Provisions for losses are charged to income.
Loans are charged off against the allowance when the collectibility of principal
is unlikely. Recoveries of loans previously charged off are credited to the
allowance.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Bank Premises and Equipment
Bank premises and equipment are carried at cost less accumulated depreciation
and amortization, except for land which is carried at cost. Bank premises and
equipment are depreciated using the straight-line method over the estimated
useful life of the assets. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
life of the improvements.
Other Real Estate Owned
Other real estate owned is comprised of properties acquired through foreclosure
or acceptance of a deed in lieu of foreclosure. Such properties are recorded
initially at estimated fair value less costs to sell. When a property is
acquired, the excess of the loan balance over the estimated fair value is
charged to the allowance for loan losses. An allowance for losses on other real
estate owned is established by a charge to income when, upon periodic evaluation
by management, further declines in the estimated fair value of properties have
occurred. Such evaluations are based on an analysis of individual properties as
well as a general assessment of current real estate market conditions.
Holding costs and rental income on properties are included in current operations
while certain costs to improve such properties are capitalized. Gains and losses
from the sale of properties are reflected in operating results when realized.
Pension and Postretirement Benefits
The Company accounts for pension and postretirement benefits on the net periodic
cost method. This method recognizes the compensation cost of employee benefits
over each employee's estimated service life. Pension costs are funded based on
the maximum amount that can be deducted for federal income tax purposes.
Employees' Stock Ownership Plan ("ESOP")
The Company recognizes compensation expense equal to the fair value of ESOP
shares during the period they are committed to be released.
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings Per Common Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the periods
presented. ESOP shares committed to be released are considered outstanding while
unallocated ESOP shares are not considered outstanding. Diluted earnings per
share is the same as basic earnings per share since the Company did not have any
stock option plans in effect as of December 31,
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
1998. The Company expects to submit a stock option plan for the approval of
stockholders at its annual meeting in April 1999.
Earnings per share is not presented for the period from March 24, 1998 (the date
of conversion to a stock company) through December 31, 1998 as the earnings per
share calculation for that period is not meaningful. Earnings per share is not
presented for the periods prior to the conversion to stock form since the Bank
was a mutual savings bank and no stock was outstanding.
New Accounting Pronouncements
Effective January 1, 1997, the Bank adopted Statement of Financial Accounting
Standards (" SFAS") No. 125, "Accounting for Transfers of Financial Assets and
Extinguishment of Liabilities." This Statement is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
December 31, 1996. However, SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS No. 125," requires the deferral of implementation as
it relates to repurchase agreements, dollar-rolls, securities lending and
similar transactions until years beginning after December 31, 1997. Adoption of
SFAS No. 125 and SFAS No. 127 in 1998 did not have a significant effect on the
Company's financial position or results of operations.
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 129, "Disclosure of Information About Capital Structure," which is effective
for the Company's 1998 financial statements. The Company's disclosures comply
with the provisions of this Statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This Statement establishes standards for reporting and displaying comprehensive
income, which is defined as all changes to equity except investments by and
distributions to shareholders. Net income is a component of comprehensive
income, with all other components referred to in the aggregate as other
comprehensive income. The Company's financial statements comply with the
provisions of this Statement.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for the Company's
1998 financial statements. This Statement establishes standards for reporting
information about operating segments. An operating segment is defined as a
component of a business for which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and evaluate performance. The Company has determined
that its business is comprised of a single operating segment and that SFAS No.
131 therefore has no impact on its financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which is effective for the
Company's 1998 financial statements. This Statement standardizes disclosure
requirements for pensions and other postretirement benefits to the extent
practicable. The Company's disclosures comply with the provisions of this
Statement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in its
balance sheet and 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 the resulting designation. The Company is required to adopt this
Statement effective January 1, 2000. Through December 31, 1998, the Company's
use of derivative instruments has not been material.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(2) Reorganization and Stock Offering (Dollars in Thousands, Except Per Share
Data)
The Company is a Massachusetts corporation that was organized in November 1997
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. Costs related to the Offering (primarily marketing fees paid
to an underwriting firm, professional fees, registration fees, and printing and
mailing costs) aggregated $1,957 and have been deducted to arrive at net
proceeds of $134,790 from the Offering. 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, acquire investment securities and repurchase shares of the
Company's common stock in the open market.
As part of the Offering and as required by regulation, the Bank established a
liquidation account equal to $58,924, or 47% of the retained earnings of the
Bank as of August 31, 1997, the date of the latest balance sheet presented in
the Offering prospectus. The liquidation account is 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
balance is reduced annually to the extent that eligible depositors have reduced
their qualifying deposits as of each anniversary date. Subsequent increases in
deposit account balances do not restore an account holder's interest in the
liquidation account. The liquidation account approximated $18,893 at December
31, 1998.
(3) Cash and Short-Term Investments (In Thousands)
Aggregate reserves (in the form of deposits with the Federal Reserve Bank and
vault cash) of $1,209 and $1,558 were maintained to satisfy federal regulatory
requirements at December 31, 1998 and 1997, respectively.
Short-term investments are summarized as follows:
December 31,
-------------------------
1998 1997
---------- ----------
Repurchase agreements........................... $ 12,000 $ --
Money market funds.............................. 7,560 7,570
Federal funds................................... 2,038 4,000
Other deposits.................................. 1,062 100
---------- ----------
$ 22,660 $ 11,670
========== ==========
Short-term investments are stated at cost which approximates market. Money
market funds are invested in a mutual fund whose assets are comprised primarily
of U.S. Treasury obligations, commercial paper and certificates of deposit with
average maturities of 90 days or less.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(4) Investment Securities (In Thousands)
Securities available for sale and held to maturity are summarized below:
December 31, 1998
----------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
----------- ---------- --------- ----------
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations.......... $ 88,186 $ 624 $ -- $ 88,810
Corporate obligations........................... 8,218 12 47 8,183
Collateralized mortgage obligations............. 5,982 -- 41 5,941
----------- ---------- --------- ----------
Total debt securities......................... 102,386 636 88 102,934
Marketable equity securities....................... 7,939 22,695 39 30,595
----------- ---------- --------- ----------
Total securities available for sale........... $ 110,325 $ 23,331 $ 127 $ 133,529
=========== ========== ========= ==========
Securities held to maturity:
U.S. Government and Agency obligations............. $ 4,014 $ 24 $ -- 4,038
Corporate obligations.............................. 116,426 659 73 117,012
Mortgage-backed securities......................... 950 44 1 993
----------- ---------- --------- ----------
Total securities held to maturity............. $ 121,390 $ 727 $ 74 $ 122,043
=========== ========== ========= ==========
December 31, 1997
----------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
----------- ---------- --------- ----------
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations.......... $ 74,088 $ 213 $ 14 $ 74,287
Corporate obligations........................... 15,341 16 24 15,333
----------- ---------- --------- ----------
Total debt securities......................... 89,429 229 38 89,620
Marketable equity securities....................... 6,168 21,881 32 28,017
----------- ---------- --------- ----------
Total securities available for sale........... $ 95,597 $ 22,110 $ 70 $ 117,637
=========== ========== ========= ==========
Securities held to maturity:
U.S. Government and Agency obligations............. $ 8,032 $ 4 $ 4 $ 8,032
Corporate obligations.............................. 56,147 123 16 56,254
Mortgage-backed securities......................... 1,265 56 7 1,314
----------- ---------- --------- ----------
Total securities held to maturity............. $ 65,444 $ 183 $ 27 $ 65,600
=========== ========== ========= ==========
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Restricted equity securities are as follows:
December 31,
1998 1997
---------- ----------
Federal Home Loan Bank of Boston stock............... $ 4,921 $ 3,468
Massachusetts Savings Bank Life
Insurance Company stock............................ 253 253
---------- ----------
$ 5,174 $ 3,721
========== ==========
As a voluntary member of the Federal Home Loan Bank of Boston ("FHLB"), the
Company is required to invest in $100 par value stock of the FHLB in an amount
equal to 1% of its outstanding home loans or 5% of its outstanding advances from
the FHLB, whichever is higher. As and when such stock is redeemed, the Company
would receive from the FHLB an amount equal to the par value of the stock. At
its discretion, the FHLB may declare dividends on the stock. Such dividends
amounted to $260, $212 and $183 for the years ended December 31, 1998, 1997 and
1996, respectively.
The maturities of the investments in debt securities at December 31, 1998 are as
follows:
Available for sale
-------------------------------
Amortized Estimated
Maturity cost fair value
- - -------- ---------- ----------
Within 1 year...................................................................... $ 48,021 $ 48,264
After 1 year through 5 years....................................................... 53,819 54,151
After 5 years through 10 years..................................................... -- --
Over 10 years...................................................................... 546 519
---------- ----------
$ 102,386 $ 102,934
========== ==========
Held to maturity
-------------------------------
Amortized Estimated
Maturity cost fair value
- - -------- ---------- ----------
Within 1 year...................................................................... $ 45,917 $ 46,119
After 1 year through 5 years....................................................... 74,023 74,431
After 5 years through 10 years..................................................... 866 876
Over 10 years...................................................................... 584 617
---------- ----------
$ 121,390 $ 122,043
========== ==========
Mortgage-backed securities are included above based on their contractual
maturities (primarily in excess of 10 years); the expected lives, however, are
expected to be shorter due to anticipated payments.
Sales of investment securities, all of which were marketable equity securities,
are summarized as follows:
Year ended December 31,
--------------------------------------
1998 1997 1996
------- --------- ----------
Proceeds from sales........................................................... $ 3,687 $ 752 $ 2,712
Gross gains from sales........................................................ 2,843 74 469
Gross losses from sales....................................................... -- -- 5
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(5) Loans (In Thousands)
A summary of loans follows:
December 31,
---------------------------------
1998 1997
------------- ------------
Mortgage loans:
One-to-four family ............................................................. $ 64,467 $ 68,907
Multi-family.................................................................... 262,678 219,909
Commercial real estate.......................................................... 197,593 149,540
Construction and development.................................................... 17,255 13,382
Home equity..................................................................... 5,505 5,276
Second.......................................................................... 13,944 15,855
------------- ------------
Total mortgage loans........................................................ 561,442 472,869
Commercial loans................................................................... 13,051 9,074
Consumer loans..................................................................... 1,775 1,393
------------- ------------
Total gross loans........................................................... 576,268 483,336
Unadvanced funds on loans.......................................................... (26,096) (9,352)
Deferred loan origination fees..................................................... (1,604) (1,562)
Unearned discounts................................................................. (10) (10)
------------- ------------
Loans, excluding money market loan participations........................... 548,558 472,412
Money market loan participations................................................... 44,300 24,000
------------- ------------
$ 592,858 $ 496,412
============= ============
The Company's portfolio, other than money market loan participations, is
substantially concentrated within Massachusetts. Money market loan
participations represent purchases of a portion of loans to national companies
and organizations originated and serviced by money center banks. Such
participations generally mature between one day and three months.
The recorded investment in impaired loans, as defined by SFAS No. 114 at the
dates indicated, is as follows:
December 31,
-------------------------------
1998 1997
---------- ----------
One-to-four family mortgage loans.................................................. $ 35 $ --
Multi-family mortgage loans........................................................ 110 134
Commercial real estate mortgage loans.............................................. 1,255 2,032
---------- ----------
$ 1,400 $ 2,166
========== ==========
The average recorded investment in impaired loans for the years ended December
31, 1998, 1997 and 1996 amounted to $1,550 $4,539 and $11,427, respectively.
None of the impaired loans at December 31, 1998 and 1997 required an allowance
for impairment due primarily to prior charge-offs and/or the sufficiency of
collateral values. If interest payments on all impaired loans at December 31,
1998, 1997 and 1996 had been made in accordance with original loan agreements,
interest income of $188, $281 and $951 would have been recognized on the loans
in 1998, 1997 and 1996 compared to interest income actually recognized of $318,
$183 and $844, respectively.
Non-accrual loans amounted to $332 and $803 at December 31, 1998 and 1997,
respectively. Effective January 1, 1998, all non-accrual loans are included in
impaired loans. If interest payments on all non-accrual loans at December 31,
1997 and 1996 had been made in accordance with original loan agreements,
interest income of $80 in 1997 and $201 in 1996 would have been recognized on
the loans compared to interest income actually recognized of $6 and $39,
respectively.
Restructured loans amounted to $0 and $2,287 at December 31, 1998 and 1997,
respectively. Of the total at December 31, 1997, $1,137 was included in impaired
loans at that date. Restructured loans represent performing multi-family and
commercial real estate mortgage loans for which concessions (such as reductions
of interest rates to below market terms and/or extension of repayment terms)
have been granted due to the borrower's financial condition. If interest
payments on restructured loans not included in impaired loans at December 31,
1998, 1997 and 1996 had been made in accordance with original loan agreements,
interest income of $82, $108 and $70 would have been recognized on the loans in
1998, 1997 and 1996 compared to interest income actually recognized of $327, $46
and $134, respectively.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
A portion of certain commercial real estate loans originated and serviced by the
Company are sold periodically to other banks on a non-recourse basis. The
balance of loans acquired by other banks amounted to $12,227 and $13,610 at
December 31, 1998 and 1997, respectively. No fees are collected by the Company
for servicing such loan participations.
In the ordinary course of business, the Company makes loans to its Directors and
their related interests, generally at the same prevailing terms as those of
other borrowers. A summary of related party activity follows:
Year ended December 31,
-------------------------------
1998 1997
------------- -------------
Balance at beginning of year....................................................... $ 5,969 $ 6,176
New loans granted during the year.................................................. 1,169 --
Repayments......................................................................... (457) (207)
------- -------
Balance at end of year............................................................. $ 6,681 $ 5,969
======= =======
(6) Allowance for Loan Losses (In Thousands)
An analysis of the allowance for loan losses for the years indicated follows:
Year ended December 31,
-----------------------------------------
1998 1997 1996
---------- ----------- ----------
Balance at beginning of year....................................................... $ 12,463 $ 12,326 $ 12,326
Provision for loan losses.......................................................... 300 -- --
Charge-offs........................................................................ (1) (6) (166)
Recoveries......................................................................... 332 143 166
---------- ----------- ----------
Balance at end of year............................................................. $ 13,094 $ 12,463 $ 12,326
========== =========== ==========
(7) Bank Premises and Equipment (In Thousands)
Bank premises and equipment consist of the following:
December 31,
-----------------------------
1998 1997
----------- -----------
Land ............................................................................ $ 62 62
Office building and improvements................................................... 1,906 1,917
Furniture, fixtures and equipment.................................................. 1,410 1,737
----------- ---------
3,378 3,716
Accumulated depreciation and amortization.......................................... 2,194 2,355
----------- ---------
$ 1,184 $ 1,361
=========== =========
(8) Other Real Estate Owned (In Thousands)
The composition of other real estate owned as of the dates indicated is as
follows:
December 31,
-----------------------------
1998 1997
----------- -----------
Commercial real estate........................................................... $ 1,946 $ 1,902
Residential...................................................................... 180 657
----------- -----------
2,126 2,559
Valuation allowance.............................................................. 186 186
----------- -----------
$ 1,940 $ 2,373
=========== ===========
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
An analysis of the valuation allowance for the years indicated follows:
Year ended December 31,
---------------------------------------
1998 1997 1996
-------- -------- --------
Balance at beginning of year....................................................... $ 186 $ 221 $ 319
Provision for losses............................................................... -- -- --
Write-downs........................................................................ -- (35) (98)
-------- -------- --------
Balance at end of year............................................................. $ 186 $ 186 $ 221
======== ======== ========
Net other real estate owned income for the years indicated is comprised of the
following:
Year ended December 31,
---------------------------------------
1998 1997 1996
-------- -------- --------
Rental income...................................................................... $ 383 $ 361 $ 272
Operating and foreclosure expenses................................................. (154) (135) (122)
Gains from sales................................................................... 22 12 149
-------- -------- --------
$ 251 $ 238 $ 299
======== ======== ========
(9) Deposits (Dollars In Thousands)
A summary of deposits follows:
December 31, 1998 December 31, 1997
-------------------------- ---------------------------
Weighted Weighted
average average
Amount rate Amount rate
----------- ---- ----------- ----
Demand checking accounts........................................... $ 12,355 0.00% $ 10,582 0.00%
NOW accounts....................................................... 42,950 1.50 40,211 1.75
Savings accounts................................................... 12,838 2.50 14,090 2.50
Money market savings accounts...................................... 173,173 3.89 161,335 3.88
----------- -----------
Total transaction deposit accounts........................... 241,316 3.19 226,218 3.23
----------- -----------
Certificate of deposit accounts maturing:
Within six months............................................... 123,547 5.13 136,788 5.44
After six months but within 1 year.............................. 71,081 5.37 65,771 5.52
After 1 year but within 2 years................................. 31,737 6.03 26,336 5.97
After 2 years but within 3 years................................ 12,197 5.77 16,600 6.68
After 3 years................................................... 9,492 5.97 10,591 6.13
----------- -----------
Total certificate of deposit accounts........................ 248,054 5.38 256,086 5.62
----------- -----------
$ 489,370 4.30% $ 482,304 4.50%
=========== ===========
Certificate of deposit accounts issued in amounts of $100 or more totaled
$47,798 and $42,423 at December 31, 1998 and 1997, respectively.
Interest expense on deposit balances is summarized as follows:
Year ended December 31,
-----------------------------------------
1998 1997 1996
---------- ----------- ----------
NOW accounts....................................................................... $ 617 $ 645 $ 641
Savings accounts................................................................... 356 377 426
Money market savings accounts...................................................... 6,349 6,109 5,957
Certificate of deposit accounts.................................................... 13,877 14,569 14,751
---------- ----------- ----------
$ 21,199 $ 21,700 $ 21,775
========== =========== ==========
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(10) Borrowed Funds (Dollars In Thousands)
Borrowed funds are comprised of the following advances from the FHLB:
December 31, 1998 December 31, 1997
----------------------- ----------------------
Weighted Weighted
average average
Amount rate Amount rate
---------- ---- ---------- ----
Within 1 year ................................................... $ 11,550 6.79% $ 20,665 5.98%
Over 1 year to 2 years............................................. 9,400 6.24 11,550 6.79
Over 2 years to 3 years............................................ 9,350 6.66 9,400 6.24
Over 3 years to 4 years............................................ 15,300 6.32 9,350 6.66
Over 4 years to 5 years............................................ 30,750 5.29 15,300 6.32
Over 5 years ................................................... 18,000 6.06 3,000 6.39
---------- ----------
$ 94,350 6.02% $ 69,265 6.33%
========== ==========
The advances are secured by all the Bank's stock and deposits in the FHLB and a
general lien on one-to-four family residential mortgage loans and U.S.
Government and Agency obligations in an aggregate amount equal to outstanding
advances.
(11) Income Taxes (Dollars in Thousands)
Provision for income taxes are comprised of the following amounts:
Year ended December 31,
-----------------------------------------
1998 1997 1996
---------- ----------- ----------
Current:
Federal......................................................................... $ 10,450 $ 7,474 $ 5,957
State........................................................................... 863 155 1,773
---------- ----------- ----------
11,313 7,629 7,730
---------- ----------- ----------
Deferred:
Federal......................................................................... (404) (384) (31)
State........................................................................... (78) 82 52
----------- ----------- ----------
(482) (302) 21
----------- ------------ ----------
$ 10,831 $ 7,327 $ 7,751
========== =========== ==========
The reduction in state income tax expense for the years ended December 31, 1998
and 1997 is attributable primarily to the establishment of a real estate
investment trust.
Total income tax expense differed from the amounts computed by applying the
statutory U.S. federal income tax rate (between 34% and 35% for the years
presented) to income before tax expense as a result of the following:
Year ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
Expected income tax expense at
statutory federal tax rate................................................ $ 10,494 $ 7,322 $ 6,891
State taxes, net of federal income tax benefit.............................. 473 155 1,204
Dividend income received deduction.......................................... (173) (173) (167)
Change in federal tax rate applied to deferred
income taxes.............................................................. -- -- (123)
Other, net.................................................................. 37 23 (54)
--------- --------- ---------
$ 10,831 $ 7,327 $ 7,751
========= ========= =========
Effective income tax rates.................................................. 36.1% 34.8% 39.4%
==== ==== ====
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at the dates indicated are as
follows:
December 31,
-------------------------
1998 1997
--------- ----------
Deferred tax assets:
Allowance for loan losses....................................................... $ 5,423 $ 5,187
Pension and postretirement benefits............................................. 1,510 1,296
Depreciation.................................................................... 38 8
Other........................................................................... 154 156
--------- ---------
Total gross deferred tax assets.............................................. 7,125 6,647
--------- ---------
Deferred tax liabilities:
Unrealized gain on securities available for sale................................ 8,787 8,301
Post-1987 bad debt reserves..................................................... 114 153
Savings Bank Life Insurance Company stock....................................... 108 108
Other........................................................................... 161 126
--------- ---------
Total gross deferred tax liabilities......................................... 9,170 8,688
--------- ---------
Net deferred tax liability................................................... $ 2,045 $ 2,041
========= =========
For income tax purposes, in 1997, the Company changed its fiscal year end date
from October 31 to December 31. Historically, the Company has been subject to
special provisions in the tax law regarding allowable tax bad debt deductions
and related reserves. Bad debt deductions were determined based on loss
experience or a percentage of taxable income. The bad debt reserve balance
represents allowable deductions in excess of actual losses and consists of a
defined base-year amount (accumulated through October 31, 1988) and additional
amounts accumulated after that date.
Tax law changes were enacted in August 1996 that eliminated use of the
percentage of taxable income method for tax years after 1995 (after October 31,
1996 in the case of the Company) and required recapture into taxable income over
a six year period all bad debt reserves accumulated after October 31, 1988. The
Company had previously recorded a deferred tax liability with respect to these
post-1987 reserves and, therefore, this new requirement had no effect on the
Company's income tax expense or net income.
The tax law changes also require recapture of pre-1988 bad debt reserves into
taxable income if the Bank makes "non-dividend distributions." Non-dividend
distributions is defined as distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. The amount of additional taxable income from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes a
non-dividend distribution to the Company, approximately one and one-half times
the amount of such distribution (but not in excess of the amount of such
reserves) would be includable in income for federal income tax purposes,
assuming a 35% federal corporate income tax rate. The Bank does not intend to
pay dividends that would result in recapture of any portion of its bad debt
reserves, and accordingly, has not provided for any portion of the $772
liability relating to the balance of its pre-1988 bad debt reserves.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(12) Employee Benefits (Dollars In Thousands)
Pension and Postretirement Benefits
The Company sponsors a non-contributory defined benefit pension plan and other
postretirement benefits. The pension plan covers all employees who meet specific
age and length of service requirements and provides for benefits to be paid to
eligible employees at retirement based primarily upon their years of service
with the Company and the average of their three highest consecutive years of
compensation. Other postretirement benefits provide for part of the annual
expense of health insurance premiums for retired employees and their dependents.
The following table provides a reconciliation of the changes in the benefit
obligations and fair value of assets for the defined pension plan and
postretirement benefits for the years ended October 31, the latest plan
valuation dates.
Pension Benefits Postretirement Benefits
----------------------------- ---------------------------
1998 1997 1998 1997
----------- --------- ---------- ---------
Reconciliation of benefit obligation:
Obligation at beginning of period................... $ 4,706 $ 4,338 $ 409 $ 366
Service cost........................................ 247 247 31 29
Interest cost....................................... 341 325 31 26
Actuarial (gain) loss............................... (139) (14) 71 --
Benefit payment..................................... (191) (190) (12) (12)
----------- --------- ---------- ---------
Obligation at end of period...................... $ 4,964 $ 4,706 $ 530 $ 409
=========== ========= ========== =========
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of period.... $ 5,523 $ 4,833 $ -- $ --
Actual return on plan assets........................ 444 880 -- --
Benefit payments.................................... (191) (190) -- --
----------- --------- ---------- ---------
Fair value of plan assets at end of period....... $ 5,776 $ 5,523 $ -- $ --
=========== ========= ========== =========
Funded status:
Funded status at end of period...................... $ 812 $ 817 $ (530) $ (409)
Unrecognized (gain) loss............................ (2,107) (2,055) 2 (74)
Unrecognized transition asset....................... (55) (58) 296 313
----------- --------- --------- ---------
Net amount recognized as a liability in the
Company's balance sheet as of October 31......... $ (1,350) $ (1,296) $ (232) $ (170)
=========== ========= ========= =========
The defined benefit pension plan assets are invested primarily in U.S.
Government obligations and equity securities.
The following table provides the components of net periodic benefit cost for the
plans for the years ended October 31.
Pension Benefits Postretirement Benefits
----------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- ---------- ----------- ----------
Service cost...................... $ 247 $ 247 $ 276 $ 31 $ 29 $ 24
Interest cost..................... 341 325 328 31 26 26
Expected return on plan assets.... (442) (387) (326) -- -- --
Transition obligation............. (3) (3) (3) 17 13 18
Actuarial gain.................... (90) (67) (10) -- -- --
---------- ---------- ---------- ---------- ----------- ----------
Net periodic benefit costs.... $ 53 $ 115 $ 265 $ 79 $ 68 $ 68
========== ========== ========== ========== =========== ==========
The pension and postretirement benefits expense for the years ended December 31,
1998, 1997 and 1996 amounted to $130, $150 and $332, respectively.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Assumptions used in determining the actuarial present value of the projected
benefit obligations are shown in the following table:
Pension Benefits Postretirement Benefits
----------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- ---------- ----------- ----------
Discount rate......................... 7.25% 7.50% 7.00% 6.75% 7.50% 7.50%
Rate of Increase in compensation...... 6.00 6.00 6.00 N/A N/A N/A
Expected long-term rate of return
on plan assets.................... 8.00 8.00 8.00 N/A N/A N/A
The assumed health care trend used to measure the accumulated postretirement
benefit obligation was 7% initially, decreasing gradually to 5% in 2001and
thereafter. Assumed health care trend rates may have a significant effect on the
amounts reported for the postretirement benefit plan. A 1% change in assumed
health care cost trend rates would have the following effects:
1% Increase 1% Decrease
----------- -----------
Effect on total service and interest cost components
of net periodic postretirement benefit costs.......................... $14 $(15)
Effect on the accumulated postretirement benefit
obligation............................................................ 91 (94)
Supplemental Executive Retirement Agreements
The Company maintains agreements that provide supplemental retirement benefits
to certain executive officers. Total expense for benefits payable under the
agreement amounted to $425, $503 and $311 for the years ended December 31, 1998,
1997 and 1996, respectively. Aggregate benefits payable included in accrued
expenses and other liabilities at December 31, 1998 and 1997 amounted to $1,973
and $1,548, respectively.
Employee Stock Ownership Plan
On March 24, 1998, the Board of Directors approved an Employee Stock Ownership
Plan ("ESOP") that became effective November 1, 1997. The Plan is designed to
provide eligible employees the advantage of ownership of Company stock.
Employees are eligible to participate in the Plan after reaching age twenty-one,
completing one year of service and working at least one thousand hours of
consecutive service during the year. Contributions are allocated to eligible
participants on the basis of compensation.
The ESOP is authorized to purchase in the open market up to 4% of the common
stock sold in the Offering, or 546,986 shares, and 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, subject to IRS limitations.
Shares used as collateral to secure the loan are released and available for
allocation to eligible employees as the principal and interest on the loan is
paid. Employees vest in their ESOP account at a rate of 20% annually commencing
in the year of completion of three years of credited service or immediately if
service is terminated due to death, retirement, disability or change in control.
Employees of the Bank as of October 31, 1997 received credit for vesting
purposes for each continuous year of service involving at least one thousand
hours up to a maximum of three years of credited service. Dividends on released
shares are credited to the participants' ESOP accounts. Dividends on unallocated
shares are generally applied towards payment of the loan. ESOP shares committed
to be released are considered outstanding in determining earnings per share.
At December 31, 1998, the ESOP held 386,457 unallocated shares at an aggregate
cost of $4,941; the market value of such shares at that date was $4,444. For the
year ended December 31, 1998, $291 was charged to compensation and employee
benefits expense based on the commitment to release 21,143 shares to eligible
employees.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
401(K) Plan
The Company has an employee tax deferred thrift incentive plan under Section
401(k) of the Internal Revenue Code. All employees who meet specified age and
length of service requirements are eligible for voluntary participation in the
Plan. The Plan is administered by SBERA and the Company makes no contribution to
the Plan.
(13) Commitments and Contingencies (In Thousands)
Off-Balance Sheet Financial Instruments
The Company is party to off-balance sheet risk in the normal course of business
to meet the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit and involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the consolidated balance sheet. The contract
amounts reflect the extent of the involvement the Company has in particular
classes of these instruments. The Company's exposure to credit loss in the event
of nonperformance by the other party to the financial instrument is represented
by the contractual amount of those instruments. The Company uses the same
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Financial instruments with off-balance sheet risk at the dates indicated
follows:
December 31,
-------------------------------
1998 1997
---------- ----------
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans:
One-to-four family mortgage...................................................... $ 2,877 $ 5,569
Multi-family mortgage............................................................ 10,200 10,448
Commercial real estate mortgage.................................................. 29,404 8,705
Construction and development mortgage............................................ 2,185 3,796
Commercial....................................................................... 763 3,215
Unadvanced portion of loans......................................................... 26,096 9,352
Unused lines of credit:
Equity........................................................................... 7,925 8,803
Other............................................................................ 1,335 1,365
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee by the customer. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's credit-worthiness on a case-by-case basis. The amount of collateral
obtained, if any, is based on management's credit evaluation of the borrower.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Lease Commitments
The Company leases certain office space under various noncancellable operating
leases. A summary of future minimum rental payments under such leases at the
dates indicated follows:
Year ending
December 31,
------------
1999............................................................. $ 300
2000............................................................. 295
2001............................................................. 275
2002............................................................. 176
2003............................................................. 176
The leases contain escalation clauses for real estate taxes and other
expenditures. Total rental expense was $307, $305 and $258 for the years ended
December 31, 1998, 1997 and 1996, respectively.
SWAP Agreement
Effective April 14, 1998, the Company 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 Company 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 Company 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 was $13 for the
year ended December 31, 1998.
Legal Proceedings
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consulting with legal counsel,
the consolidated financial position and results of operations of the Company
will not be affected materially by the outcome of such proceedings.
(14) Stockholders' Equity (Dollars in Thousands, Except Per Share Data)
Preferred Stock
The Company is authorized to issue 5,000,000 shares of serial preferred stock,
par value $0.01 per share, from time to time in one or more series subject to
limitations of law, and the Board of Directors is authorized to fix the
designations, powers, preferences, limitations and rights of the shares of each
such series. As of December 31, 1998, there were no shares of preferred stock
issued.
Common Stock Repurchases and Dividends
On October 20, 1998, the Company received regulatory approval to repurchase
1,454,750 shares, or 5% of the common shares issued by the Company. The approval
sets no time limit for the repurchases. Shares may not be repurchased, nor may
the Company or the Bank declare or pay dividends to common stockholders if the
effect thereof would cause stockholders' equity to be reduced below the required
liquidation account balance (see note 2) or minimum regulatory capital levels.
As of December 31,1998, the Company acquired 113,500 shares at an aggregate cost
of $1,316.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(15) Regulatory Capital Requirements (Dollars In Thousands)
Bank regulatory agencies have established capital adequacy standards which are
used extensively in their monitoring and control of the industry. These
standards relate capital to average assets and to level of risk by assigning
different weighting to assets and certain off-balance sheet activity. The
capital ratios of the Company (on a consolidated basis) and the Bank set forth
below currently exceed the minimum ratios for "well capitalized" banks as
defined by federal regulators.
Minimum To
Minimum Be Categorized As
Actual Capital Requirement Well Capitalized
-------------------------- --------------------------- -------------------------
At December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
- - -------------------- ------------- ----------- ------------- ---------- ------------- ---------
Tier I Capital (to average assets):
The Company $ 263,857 31.15% $ 33,880 4.00% N/A --
The Bank 203,978 25.86 31,553 4.00 $ 39,441 5.00%
Tier I Capital (to risk-weighted assets):
The Company 263,857 37.48 28,158 4.00 N/A -
The Bank 203,978 29.34 27,812 4.00 41,718 6.00
Total Capital (to risk-weighted assets):
The Company 282,904 40.19 56,315 8.00 N/A -
The Bank 222,898 32.06 55,624 8.00 69,530 10.00
Minimum To
Minimum Be Categorized As
Actual Capital Requirement Well Capitalized
-------------------------- --------------------------- -------------------------
At December 31, 1997(A) Amount Ratio Amount Ratio Amount Ratio
- - ----------------------- ------------- ----------- ------------- ---------- ------------- ---------
Tier I Capital (to average assets)
The Bank $ 119,069 17.82% $ 26,730 4.00% $ 33,412 5.00%
Tier I Capital (to risk-weighted assets):
The Bank 119,069 21.49 22,166 4.00 33,249 6.00
Total Capital (to risk-weighted assets):
The Bank 126,064 22.75 44,332 8.00 55,415 10.00
(A) No information is presented for The Company as it had no assets or
liabilities at December 31, 1997.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(16) Fair Value of Financial Instruments (In Thousands)
The following is a summary of the carrying values and estimated fair values of
the Company's significant financial and non-financial instruments as of the
dates indicated:
December 31, 1998 December 31, 1997
-------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
------------ ----------- ------------ ------------
Financial assets:
Cash and due from banks........................... $ 6,657 $ 6,657 $ 8,843 $ 8,843
Short-term investments............................ 22,660 22,660 11,670 11,670
Securities........................................ 260,093 260,746 186,802 186,958
Loans, net........................................ 579,764 583,658 483,949 486,192
Accrued interest receivable....................... 6,457 6,457 5,240 5,240
Financial liabilities:
Demand, NOW, savings and money
market savings deposit accounts................. 241,316 241,316 226,218 226,218
Certificate of deposit accounts................... 248,054 248,888 256,086 255,226
Borrowed funds.................................... 94,350 95,731 69,265 68,848
Swap agreement.................................... -- 197 -- --
SFAS No. 107 requires disclosures about fair values of financial instruments for
which it is practicable to estimate fair value. Fair value is defined in SFAS
No. 107 as the amount that a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced liquidation
sale. Quoted market prices are used to estimate fair values when those prices
are available. However, active markets do not exist for many types of financial
instruments. Consequently, fair values for these instruments must be estimated
by management using techniques such as discounted cash flow analysis and
comparison to similar instruments. These instruments are highly subjective and
require judgments regarding significant matters such as the amount and timing of
future cash flows and the selection of discount rates that may appropriately
reflect market and credit risks. Changes in these judgments often have a
material impact on the fair value estimates. In addition, since these estimates
are as of a specific point in time, they are susceptible to material near-term
changes. Fair values disclosed in accordance with SFAS No. 107 do not reflect
any premium or discount that could result from the sale of a large volume of a
particular financial instrument, nor do they reflect the possible tax
ramifications or estimated transaction costs.
The following is a description of the principal valuation methods used by the
Company to estimate the fair values of its financial instruments:
Securities
The fair values of securities were based principally on market prices and dealer
quotes. Certain fair values were estimated using pricing models or were based on
comparisons to market prices of similar securities. The fair value of stock in
the FHLB equals its carrying amount since such stock is only redeemable at its
par value.
Loans
The fair value of performing loans, other than money market loan participations,
is estimated by discounting the contractual cash flows using interest rates
currently being offered for loans with similar terms to borrowers of similar
quality. The fair value of money market loan participations is considered to
equal their carrying amounts since such loans generally are repayable within 90
days. For non-performing loans where the credit quality of the borrower has
deteriorated significantly, fair values are estimated by discounting cash flows
at a rate commensurate with the risk associated with those cash flows.
Deposit Liabilities
In accordance with SFAS No. 107, the fair values of deposit liabilities with no
stated maturity (demand, NOW, savings and money market savings accounts) are
equal to the carrying amounts payable on demand. The fair value of time deposits
represents contractual cash flows discounted using interest rates currently
offered on deposits with similar characteristics
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
and remaining maturities. The fair value estimates for deposits do not include
the benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of alternative forms of funding ("deposit based
intangibles").
Borrowed Funds
The fair value of borrowings from the FHLB represent contractual repayments
discounted using interest rates currently available for borrowings with similar
characteristics and remaining maturities.
Other Financial Assets and Liabilities
Cash and due from banks, short-term investments and accrued interest receivable
have fair values which approximate the respective carrying values because the
instruments are payable on demand or have short-term maturities and present
relatively low credit risk and interest rate risk.
Off-Balance Sheet Financial Instruments
In the course of originating loans and extending credit, the Company will charge
fees in exchange for its commitment. While these commitment fees have value, the
Company has not estimated their value due to the short-term nature of the
underlying commitments and their immateriality.
Swap Agreement
The fair value is estimated as the difference in the present value of future
cash flows between the Company's existing agreement and current market rate
agreements of the same duration.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(17) Condensed Parent Company Financial Statements (Dollars In Thousands)
Condensed parent company financial statements as of and for the period from
March 24, 1998 (the date the Company commenced operations) through December 31,
1998 follow.
Balance Sheet
-------------
December 31,
1998
------------
Assets
Cash and due from banks..................................... $ 33
Short-term investments...................................... 1,500
Money market loan participations............................ 2,000
Equity securities available for sale........................ 48
Loan to Bank ESOP........................................... 4,913
Accrued interest receivable................................. 7
Investment in subsidiaries, at equity....................... 274,726
------------
Total assets.......................................... $ 283,227
============
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities...................... 50
Deferred income tax liability............................... 5
------------
Total liabilities..................................... 55
Total stockholders' equity.................................. 283,172
------------
Total liabilities and stockholders' equity............ $ 283,227
============
The Company's consolidated stockholders' equity is $ 4,950 less than the amount
presented above because of the elimination of the effect of unallocated ESOP
shares in consolidation.
Statement of Income
-------------------
Period From March 24,
1998 Through
December 31, 1998
----------
Interest income:
Short-term investments................................................. $ 248
Money market loan participations....................................... 450
Loan to Bank ESOP...................................................... 188
----------
Total interest income............................................... 886
----------
Expenses:
Directors' fees........................................................ 39
Other.................................................................. 45
----------
Total expenses...................................................... 84
----------
Income before income taxes and equity in undistributed net
income of subsidiaries........................................... 802
Income taxes.............................................................. 338
----------
Income before equity in undistributed net income of subsidiaries.... 464
Equity in undistributed net income of subsidiaries........................ 15,303
----------
Net income.......................................................... $ 15,767
==========
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Statement of Cash Flows
Period from March
24, 1998 Through
December 31, 1998
-----------------
Cash flows from operating activities:
Net income............................................................. $ 15,767
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiaries............... (15,303)
Deferred income taxes............................................ 3
Increase in accrued interest receivable.......................... (7)
Increase in accrued expenses and other liabilities............... 61
----------
Net cash used by operating activities...................... 521
----------
Cash flows from investing activities:
Investment in subsidiaries............................................. (122,597)
ESOP loan to subsidiary................................................ (5,248)
Repayment of ESOP loan by subsidiary................................... 335
Purchase of securities available for sale.............................. (42)
-----------
Net cash used for investing activities..................... (127,552)
----------
Cash flows from financing activities:
Net proceeds from issuance of common stock............................. 134,790
Purchase of treasury stock............................................. (1,316)
Payment of common stock dividends...................................... (2,910)
----------
Net cash provided by financing activities.................. 130,564
----------
Net increase in cash and cash equivalents................................. 3,533
Cash and cash equivalents at beginning of period.......................... --
----------
Cash and cash equivalents at end of period................................ $ 3,533
==========
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes........................... $ 227
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(18) Quarterly Results of Operations (Unaudited, Dollars In Thousands Except Per
Share Data)
1998 Quarters
--------------------------------------------------------
Fourth Third Second First
------ ----- ------ -----
Interest income................................. $ 15,838 $ 16,006 $ 15,219 $ 14,356
Interest expense................................ 6,729 6,467 6,274 6,690
--------- --------- --------- ---------
Net interest income.......................... 9,109 9,539 8,945 7,666
Provision for loan losses....................... 200 -- 100 --
--------- --------- --------- ---------
Net interest income after provision
for loan losses........................... 8,909 9,539 8,845 7,666
Gains on sales of securities, net............... 1,171 426 1,238 8
Other real estate owned income net.............. 86 64 52 49
Other non-interest income....................... 279 237 310 285
Non-interest expense............................ (2,420) (2,305) (2,331) (2,125)
--------- --------- --------- ---------
Income before income taxes................... 8,025 7,961 8,114 5,883
Provision for income taxes...................... 2,911 2,836 2,971 2,113
--------- --------- --------- ---------
Net income................................... $ 5,114 $ 5,125 $ 5,143 $ 3,770
========= ========= ========= =========
Basic and diluted earnings per share............ $ 0.18 $ 0.18 $ 0.18 NM
NM - Not meaningful
1997 Quarters
--------------------------------------------------------
Fourth Third Second First
--------- --------- --------- ---------
Interest income................................. $ 13,553 $ 13,424 $ 13,269 $ 13,879
Interest expense................................ 6,531 6,517 6,474 6,336
--------- --------- --------- ---------
Net interest income.......................... 7,022 6,907 6,795 7,543
Provision for loan losses....................... -- -- -- --
--------- --------- --------- ---------
Net interest income after provision
for loan losses........................... 7,022 6,907 6,795 7,543
Gains on sales of securities, net............... -- -- 70 4
Other real estate owned income, net............. 49 69 67 53
Other non-interest income....................... 230 166 306 151
Non-interest expense............................ (1,964) (2,137) (2,115) (2,158)
--------- --------- --------- ---------
Income before income taxes................... 5,337 5,005 5,123 5,593
Provision for income taxes...................... 1,876 1,699 1,752 2,000
--------- --------- --------- ---------
Net income................................... $ 3,461 $ 3,306 $ 3,371 $ 3,593
========= ========= ========= =========
Basic and diluted earnings per share - not applicable