- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
COMMISSION FILE NUMBER 0-23695
BROOKLINE BANCORP, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3402944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 WASHINGTON STREET, BROOKLINE, MA 02447-0469
(Address of principal executive offices) (Zip Code)
(617) 730-3500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the latest practicable date.
Common Stock, $0.01 par value--28,862,300 shares outstanding as of
August 09, 1999.
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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998 ......................... 1
Consolidated Statements of Income for the three months and
six months ended June 30, 1999 and 1998 ........................... 2
Consolidated Statements of Comprehensive Income for
the three months and six months ended June 30, 1999 and 1998 ...... 3
Consolidated Statements of Changes in Stockholders'
Equity for the six months ended June 30, 1999 and 1998 ............ 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 ............................... 6
Notes to Consolidated Financial Statements ........................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risks ....... 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 21
Item 2. Changes in Securities ............................................. 21
Item 3. Defaults upon Senior Securities ................................... 21
Item 4. Submission of Matters to a Vote of Security Holders ............... 22
Item 5. Other Information ................................................. 22
Item 6. Exhibits and Reports on Form 8-K .................................. 22
Signature Page .................................................... 23
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
ASSETS
Cash and due from banks............................................ $ 7,744 $ 6,657
Short-term investments............................................. 14,895 22,660
Securities available for sale...................................... 139,597 133,529
Securities held to maturity (market value of $118,821
and $122,043, respectively)...................................... 119,370 121,390
Restricted equity securities....................................... 6,189 5,174
Loans, excluding money market loan participations 599,184 548,558
Money market loan participations................................... 23,900 44,300
Allowance for loan losses.......................................... (13,399) (13,094)
---------- ------------
Net loans..................................................... 609,685 579,764
---------- ------------
Accrued interest receivable........................................ 6,305 6,457
Bank premises and equipment, net................................... 1,349 1,184
Other real estate owned, net....................................... 1,919 1,940
Other assets....................................................... 260 272
---------- ------------
Total assets.................................................. $ 907,313 $ 879,027
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits........................................................... $ 504,575 $ 489,370
Borrowed funds..................................................... 109,300 94,350
Mortgagors' escrow accounts........................................ 3,433 3,308
Income taxes payable............................................... 3,819 5,843
Deferred income tax liability, net................................. 354 2,045
Accrued expenses and other liabilities............................. 6,360 5,889
---------- ------------
Total liabilities............................................. 627,841 600,805
---------- ------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
none issued....................................................
Common stock, $.01 par value; 45,000,000 shares authorized,
29,641,500, and 29,095,000 shares issued...................... 296 291
Additional paid-in capital....................................... 140,386 134,490
Retained earnings................................................ 142,763 135,282
Accumulated other comprehensive income........................... 13,329 14,416
Treasury stock, at cost - 671,700 shares
and 113,500 shares, respectively............................... (7,725) (1,316)
Unearned compensation - recognition and retention plan (4,635) --
Unallocated common stock held by ESOP - 390,642 shares
and 386,457 shares, respectively................................ (4,942) (4,941)
---------- ------------
Total stockholders' equity.................................... 279,472 278,222
---------- ------------
Total liabilities and stockholders' equity.................... $ 907,313 $ 879,027
---------- ------------
---------- ------------
See accompanying notes to the unaudited consolidated financial statements.
1
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(UNAUDITED)
Interest income:
Loans, excluding money market loan participations........ $ 11,755 $ 10,582 $ 23,271 $ 21,112
Money market loan participations......................... 462 738 967 1,325
Debt securities.......................................... 3,324 3,020 6,613 5,560
Marketable equity securities............................. 231 171 413 352
Restricted equity securities............................. 94 59 173 115
Short-term investments................................... 117 649 355 1,111
---------- ---------- ---------- ----------
Total interest income................................. 15,983 15,219 31,792 29,575
---------- ---------- ---------- ----------
Interest expense:
Deposits................................................. 5,133 5,136 10,273 10,774
Borrowed funds........................................... 1,659 1,138 3,133 2,190
---------- ---------- ---------- ----------
Total interest expense ............................... 6,792 6,274 13,406 12,964
---------- ---------- ---------- ----------
Net interest income........................................ 9,191 8,945 18,386 16,611
Provision for loan losses.................................. 150 100 300 100
---------- ---------- ---------- ----------
Net interest income after provision for loan losses... 9,041 8,845 18,086 16,511
---------- ---------- ---------- ----------
Non-interest income:
Fees and charges......................................... 231 305 438 587
Gains on sales of securities, net........................ 2,408 1,238 3,598 1,246
Other real estate owned income, net...................... 56 52 109 101
Other income............................................. 7 5 9 8
---------- ---------- ---------- ----------
Total non-interest income............................. 2,702 1,600 4,154 1,942
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and employee benefits....................... 1,565 1,447 3,072 2,741
Recognition and retention plan........................... 1,274 -- 1,274 --
Occupancy................................................ 172 165 349 358
Equipment and data processing............................ 291 313 566 596
Advertising and marketing................................ 113 80 225 161
Other.................................................... 337 326 662 600
---------- ---------- ---------- ----------
Total non-interest expense............................ 3,752 2,331 6,148 4,456
---------- ---------- ---------- ----------
Income before income taxes................................. 7,991 8,114 16,092 13,997
Provision for income taxes................................. 2,827 2,971 5,745 5,084
---------- ---------- ---------- ----------
Net income............................................ $ 5,164 $ 5,143 $ 10,347 $ 8,913
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
outstanding during the period ........................... 28,138,891 29,004,114 28,302,082 N/A
---------- ---------- ----------
---------- ---------- ----------
Earnings per common share:
Basic ................................................ $ 0.18 $ 0.18 $ 0.36 N/A
Diluted .............................................. 0.18 0.18 0.36 N/A
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to the unaudited consolidated financial statements.
2
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(UNAUDITED)
Net income................................................. $ 5,164 $ 5,143 $ 10,347 $ 8,913
--------- --------- --------- ---------
Other comprehensive income, net of taxes:
Unrealized holding gains................................. 2,115 89 1,478 2,686
Income tax expense....................................... 739 32 428 991
--------- --------- --------- ---------
Net unrealized holding gains....................... 1,376 57 1,050 1,695
--------- --------- --------- ---------
Less reclassification adjustment for gains
included in net income:
Realized gains........................................ 2,408 1,238 3,598 1,246
Income tax expense.................................... 963 470 1,461 473
--------- --------- --------- ---------
Net reclassification adjustment.................... 1,445 768 2,137 773
--------- --------- --------- ---------
Total other comprehensive income (loss)............ (69) (711) (1,087) 922
--------- --------- --------- ---------
Comprehensive income....................................... $ 5,095 $ 4,432 $ 9,260 $ 9,835
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to the unaudited consolidated financial statements.
3
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
UNALLOCATED
ACCUMULATED UNEARNED COMMON
ADDITIONAL OTHER COMPENSATION-- STOCK TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY RECOGNITION AND HELD BY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME STOCK RETENTION PLAN ESOP EQUITY
------ ---------- -------- ------------- -------- --------------- ----------- -------------
Balance at December 31, 1997 ... $ -- $ -- $119,018 $ 13,739 $ -- $ -- $ -- $132,757
Net income ..................... -- -- 8,913 -- -- -- -- 8,913
Unrealized gain on securities
available for sale, net of
reclassification adjustment .. -- -- -- 922 -- -- -- 922
Net proceeds of stock offering
and issuance of common
stock (29,095,000 shares) .... 291 134,527 -- -- -- -- -- 134,818
Common stock acquired by
ESOP (122,500 shares) ........ -- -- -- -- -- -- (1,981) (1,981)
Common stock held by ESOP
committed to be released
(6,525 shares) ............... -- 4 -- -- -- -- 105 109
------ -------- -------- -------- ------ ------ -------- --------
Balance at June 30, 1998 ....... $ 291 $134,531 $127,931 $ 14,661 $ -- $ -- $ (1,876) $275,538
------ -------- -------- -------- ------ ------ -------- --------
------ -------- -------- -------- ------ ------ -------- --------
(Continued)
4
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
UNALLOCATED
ACCUMULATED UNEARNED COMMON
ADDITIONAL OTHER COMPENSATION-- STOCK TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY RECOGNITION AND HELD BY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME STOCK RETENTION PLAN ESOP EQUITY
------ ---------- -------- ------------- -------- --------------- ----------- -------------
Balance at December 31, 1998.... $ 291 $134,490 $135,282 $ 14,416 $ (1,316) $ -- $(4,941) $278,222
Net income...................... -- -- 10,347 -- -- -- -- 10,347
Unrealized loss on securities
available for sale, net of
reclassification adjustment.. -- -- -- (1,087) -- -- -- (1,087)
Common stock dividends
of $.10 per share............ -- -- (2,866) -- -- -- -- (2,866)
Treasury stock purchases
(558,200 shares)............. -- -- -- -- (6,409) -- -- (6,409)
Common stock issued in
conjunction with the
recognition and retention
plan (546,500 shares)........ 5 5,904 -- -- -- (5,909) -- --
Compensation under recognition
and retention plan .......... -- -- -- -- -- 1,274 -- 1,274
Common stock acquired by ESOP
(20,000 shares).............. -- -- -- -- -- -- (200) (200)
Common stock held by ESOP
committed to be released
(15,815 shares).............. -- (8) -- -- -- -- 199 191
------ -------- -------- -------- -------- ------- ------- --------
Balance at June 30, 1999........ $ 296 $140,386 $142,763 $ 13,329 $ (7,725) $(4,635) $(4,942) $279,472
------ -------- -------- -------- -------- ------- ------- --------
------ -------- -------- -------- -------- ------- ------- --------
See accompanying notes to the unaudited consolidated financial statements.
5
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
--------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net income........................................................... $ 10,347 $ 8,913
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses........................................ 300 100
Compensation under recognition and retention plan................ 1,274 --
Release of ESOP shares........................................... 191 109
Depreciation and amortization.................................... 261 234
Amortization, net of accretion, of securities premiums
and discounts.................................................. 937 391
Accretion of deferred loan origination fees
and unearned discounts......................................... (275) (231)
Net gains from sales of securities available for sale............ (3,598) (1,246)
Net gains from sales of other real estate owned.................. -- (3)
Deferred income taxes............................................ (719) (125)
(Increase) decrease in:
Accrued interest receivable.................................... 152 (746)
Other assets................................................... 12 424
Increase (decrease) in:
Income taxes payable........................................... (1,963) (3,175)
Accrued expenses and other liabilities......................... 471 (239)
--------- ---------
Net cash provided by operating activities.................... 7,390 4,406
--------- ---------
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale....... 3,673 2,449
Proceeds from redemptions and maturities of securities
available for sale................................................. 26,000 21,240
Proceeds from redemptions and maturities of securities
held to maturity................................................... 18,960 6,739
Purchase of securities available for sale............................ (34,420) (52,320)
Purchase of securities held to maturity.............................. (17,720) (35,882)
Purchase of Federal Home Loan Bank of Boston stock................... (984) (558)
Purchase of other restricted equity securities (31) --
Net increase in loans................................................ (55,096) (23,809)
Proceeds from sales of participation in loans........................ 4,750 1,739
Purchase of bank premises and equipment.............................. (406) (82)
Capital expenditures on other real estate owned...................... (12) --
Proceeds from sales of other real estate owned....................... 13 55
--------- ---------
Net cash used for investing activities....................... (55,273) (80,429)
--------- ---------
(Continued)
6
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
--------- ---------
(UNAUDITED)
Cash flows from financing activities:
Increase (decrease) in demand deposits and NOW, savings and
money market savings accounts...................................... $ 23,036 $ (2,072)
Decrease in certificates of deposit.................................. (7,831) (12,767)
Proceeds from Federal Home Loan Bank of Boston advances.............. 27,500 20,750
Repayment of Federal Home Loan Bank of Boston advances............... (12,550) (11,600)
Increase in mortgagors' escrow accounts.............................. 125 138
Net proceeds from issuance of common stock........................... -- 134,818
Purchase of common stock for ESOP.................................... (200) (1,981)
Payment of dividends on common stock................................. (2,866) --
Purchase of treasury stock........................................... (6,409) --
--------- ---------
Net cash provided by financing activities...................... 20,805 127,286
--------- ---------
Net increase (decrease) in cash and cash equivalents................... (27,078) 51,263
Cash and cash equivalents at beginning of period....................... 73,617 44,513
--------- ---------
Cash and cash equivalents at end of period............................. $ 46,539 $ 95,776
--------- ---------
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds............................ $ 13,356 $ 12,931
Income taxes....................................................... 8,419 8,383
See accompanying notes to the unaudited consolidated financial statements.
7
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and the instructions for Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation have been included. Results for the six months ended June
30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
(2) REORGANIZATION AND STOCK OFFERING (DOLLARS IN THOUSANDS)
Brookline Bancorp, Inc. (the "Company") is a Massachusetts corporation
that was organized in November 1997 at the direction of the Board of
Trustees of Brookline Savings Bank (the "Bank") for the purpose of
acquiring all of the capital stock of the Bank upon completion of the
Bank's reorganization from a mutual savings bank into a mutual holding
company structure. As part of the reorganization, the Company offered
for sale 47% of the shares of its common stock in an offering fully
subscribed for by eligible depositors of the Bank (the "Offering"). The
remaining 53% of the Company's shares of common stock were issued to
Brookline Bancorp, MHC (the "MHC"), a state-chartered mutual holding
company incorporated in Massachusetts. The reorganization and Offering
were completed on March 24, 1998. Prior to that date, the Company had no
assets or liabilities. The reorganization has been accounted for as an
"as if" pooling with assets and liabilities recorded at historical cost.
Completion of the Offering resulted in the issuance of 29,095,000 shares
of common stock, 15,420,350 shares (53%) of which were issued to the MHC
and 13,674,650 shares (47%) of which were sold to eligible depositors of
the Bank at $10.00 per share. Net proceeds from the Offering amounted to
$134.8 million. The Company contributed 50% of the net proceeds of the
Offering to the Bank for general corporate use. Net Offering proceeds
retained by the Company were used to fund a loan to the Bank's employee
stock ownership plan and acquire short-term investments and investment
securities.
As part of the Offering and as required by regulation, the Bank
established a liquidation account equal to $58,924 for the benefit of
eligible account holders and supplemental eligible account holders who
maintain their deposit accounts at the Bank after the Offering. In the
unlikely event of a complete liquidation of the Bank (and only in that
event), eligible depositors who continue to maintain deposit accounts at
the Bank shall be entitled to receive a distribution from the
liquidation account. The liquidation account is reduced annually to the
extent that eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases in deposit
account balances do not restore an account holder's interest in the
liquidation account. The liquidation account approximated $18,893 at
December 31, 1998, the latest anniversary date.
The Company and the Bank may not declare or pay dividends on and the
Company may not repurchase any of its shares of common stock if the
effect thereof would cause stockholders' equity to be reduced below the
required liquidation account balance or minimum regulatory capital
levels.
8
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(3) EMPLOYEE STOCK OWNERSHIP PLAN (DOLLARS IN THOUSANDS)
On March 24, 1998, the Board of Directors of the Bank approved an
employee stock ownership plan (the "ESOP"). All employees meeting age
and service requirements are eligible to participate in the ESOP. The
ESOP is authorized to purchase up to 4% of the common stock sold in the
Offering, or 546,986 shares, in the open market and to borrow up to
$7,500 from the Company to finance the purchase of such shares. The loan
is payable in quarterly installments over 30 years and bears interest at
8.50% per annum. The loan can be prepaid without penalty. Loan payments
are principally funded by cash contributions from the Bank and dividends
on unallocated shares of Company stock held by the ESOP, subject to IRS
limitations.
Through June 30, 1999, the ESOP has purchased 427,600 shares of common
stock in the open market at an aggregate cost of $5,448. For the six
months ended June 30, 1999, $183 was charged to compensation and
employee benefits expense based on the commitment to release 15,815
shares to eligible employees.
(4) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of shares outstanding during the periods
presented. Diluted earnings per share gives effect to all dilutive
potential shares resulting from options that were outstanding during the
periods presented.
The components of basic and diluted earnings per share for the three
months and six months ended June 30, 1999 and 1998 are as follows:
WEIGHTED NET INCOME
NET INCOME AVERAGE SHARES PER SHARE
--------------- ------------------ -------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
THREE MONTHS
ENDED JUNE 30
Basic .................. $ 5,164 $ 5,143 28,138,891 29,004,114 $ 0.18 $ 0.18
Effect of dilutive
stock options ....... -- -- 3,346 -- -- --
------- ------- ---------- ---------- ------ ------
Dilutive ............... $ 5,164 $ 5,143 28,142,237 29,004,114 $ 0.18 $ 0.18
------- ------- ---------- ---------- ------ ------
------- ------- ---------- ---------- ------ ------
SIX MONTHS
ENDED JUNE 30
Basic .................. $10,347 $ 8,913 28,302,082 N/A $ 0.36 N/A
Effect of dilutive
stock options ....... -- -- 1,682 N/A -- N/A
------- ------- ---------- ---------- ------
Dilutive ............... $10,347 $ 8,913 28,303,764 N/A $ 0.36 N/A
------- ------- ---------- ---------- ------
9
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(5) ACCUMULATED OTHER COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
Accumulated other comprehensive income is comprised entirely of
unrealized gains on securities available for sale, net of income taxes.
At June 30, 1999 and December 31, 1998, such taxes amounted to $7,754
and $8,788, respectively.
(6) COMMITMENTS AND SWAP AGREEMENT (DOLLARS IN THOUSANDS)
At June 30, 1999, the Company had outstanding commitments to originate
loans of $60,521, $44,194 of which were commercial real estate and
multi-family mortgage loans. Unused lines of credit available to
customers were $10,376, $9,055 of which were equity lines of credit.
Effective April 14, 1998, the Bank entered into an interest-rate swap
agreement with a third-party that matures April 14, 2005. The notional
amount of the agreement is $5,000. Under this agreement, each quarter
the Bank pays interest on the notional amount at an annual fixed rate of
5.9375% and receives from the third-party interest on the notional
amount at the floating three month U.S. dollar LIBOR rate. The Bank
entered into this transaction to match more closely the repricing of its
assets and liabilities and to reduce its exposure to increases in
interest rates. The net interest expense paid for the six months ended
June 30, 1999 and 1998 was $22 and $3, respectively.
(7) DIVIDEND DECLARATION
On July 15, 1999, the Board of Directors of the Company approved and
declared a regular quarterly cash dividend of $.05 per share of common
stock to shareholders of record as of July 31, 1999 and payable on
August 13, 1999.
(8) 1999 STOCK OPTION PLAN AND 1999 RECOGNITION AND RETENTION PLAN
At the annual meeting of stockholders on April 15, 1999, the
stockholders approved the Company's 1999 Stock Option Plan (the "Stock
Option Plan") and the 1999 Recognition and Retention Plan (the "RRP").
Under the Stock Option Plan, 1,367,465 shares of the Company's common
stock have been reserved for issuance to officers, employees and
non-employee directors of the Company. Shares issued upon the exercise
of a stock option may be either authorized but unissued shares or
reacquired shares held by the Company as treasury shares. Any shares
subject to an award which expires or is terminated unexercised will
again be available for issuance under the Stock Option Plan. On April
19, 1999, 1,265,500 options were awarded to officers and non-employee
directors of the Company at an exercise price of $10.8125 per share, the
fair market value of the common stock of the Company on that date. Of
the total options awarded, 410,460 options are incentive stock options
and 855,040 options are non-qualified stock options. Options awarded
vest over periods ranging from less than six months through five years.
If an individual to whom a stock option was granted ceases to maintain
continuous service by reason of normal retirement, death or disability,
or following a change in control, all options and rights granted and not
fully exercisable become exercisable in full upon the happening of such
event and shall remain exercisable
10
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
for a one year period. The Company intends to account for the Stock
Option Plan by using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Pro forma disclosures of net income and earnings per share
will be made as if the fair value based method of accounting defined in
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," had been applied.
Under the RRP, 546,986 shares of the Company's common stock have been
reserved for issuance as restricted stock awards to officers, employees
and non-employee directors in recognition of prior service and as an
incentive for such individuals to remain with the Company. Shares issued
upon vesting may be either authorized but unissued shares or reacquired
shares held by the Company as treasury shares. Any shares not issued
because vesting requirements are not met will again be available for
issuance under the RRP. On April 19, 1999, 546,500 shares were awarded
to officers and non-employee directors of the Company. The shares vest
over varying time periods ranging from six months up to eight years. In
the event a recipient ceases to maintain continuous service with the
Company by reason of normal retirement, death or disability, or
following a change in control, RRP shares still subject to restrictions
will vest and be free of such restrictions. A significant number of
shares vest in 1999 and 2000. Expense is recognized for shares awarded
over the vesting period at the fair market value of the shares on the
date they were awarded, or $10.8125 per share. Assuming all shares vest
according to the terms of the awards, the Company's pre-tax operating
expenses will be charged by the following amounts in the periods
indicated (in thousands):
YEAR 1999
---------
Second quarter (actual expense) ..... $ 1,274
Third quarter ....................... 1,638
Fourth quarter ...................... 683
---------
3,595
---------
YEAR 2000
---------
First quarter ....................... 397
Second quarter ...................... 376
Third quarter ....................... 366
Fourth quarter ...................... 115
---------
1,254
---------
Year 2001 ........................... 172
Year 2002 ........................... 172
Year 2003 ........................... 172
Year 2004 ........................... 166
Year 2005 ........................... 164
Year 2006 ........................... 164
Year 2007 ........................... 50
---------
$ 5,909
---------
---------
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Brookline Bancorp, Inc. (the "Company") was organized in November 1997
for the purpose of acquiring all of the capital stock of Brookline Savings Bank
(the "Bank") upon completion of the Bank's reorganization from a mutual savings
bank into a mutual holding company structure. As part of the reorganization, the
Company offered for sale 47% of the shares of its common stock in an offering
fully subscribed for by eligible depositors of the Bank (the "Offering"). The
remaining 53% of the Company's shares of common stock were issued to Brookline
Bancorp, MHC, a state-chartered mutual holding company incorporated in
Massachusetts. The reorganization and Offering were completed on March 24, 1998.
See note 2 to the unaudited consolidated financial statements for further
information about the reorganization and the Offering.
Prior to March 24, 1998, the Company had no assets or liabilities. Its
principal activities since that date through June 30, 1999 have been to complete
the Offering, acquire all of the capital stock of the Bank, contribute 50% of
the net proceeds of the Offering to the Bank and use the remaining 50% of the
net proceeds to acquire investment securities and fund a loan to the Bank's
employee stock ownership plan.
The reorganization has been accounted for as an "as if" pooling with
assets and liabilities recorded at historical cost. The unaudited consolidated
financial statements include the accounts of the Company, the Bank and
subsidiaries of the Company and the Bank.
This quarterly report on Form 10-Q contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those contemplated by such forward-looking statements.
These important factors include, without limitation, the Bank's continued
ability to originate quality loans, fluctuation of interest rates, real estate
market conditions in the Bank's lending areas, general and local economic
conditions, the Bank's continued ability to attract and retain deposits, the
Company's ability to control costs, new accounting pronouncements and changing
regulatory requirements.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND DECEMBER 31, 1998
Total assets increased by $28.3 million, or 3.2%, from $879.0 million at
December 31, 1998 to $907.3 million at June 30, 1999. Excluding money market
loan participations, the loan portfolio increased by $50.6 million, or 9.2%,
from $548.6 million at December 31, 1998 to $599.2 million at June 30, 1999.
Growth took place in the multi-family mortgage loan sector ($16.0 million, or
6.1%), the commercial real estate mortgage loan sector ($14.3 million, or 7.2%),
the commercial loan sector ($14.5 million, or 111.2%) and the one-to-four family
mortgage loan sector ($4.8 million, or 7.5%). Changes in other sectors of the
loan portfolio were modest. Most of the growth in the commercial loan sector was
attributable to a $10 million participation maturing in one year. Part of the
growth in the loan portfolio was funded by a reduction in money market loan
participations from $44.3 million at December 31, 1998 to $23.9 million at June
30, 1999. Generally, participations represent purchases of a portion of loans to
national companies and organizations originated and serviced by money center
banks that mature between one day and three months. The Company views such
participations as an alternative investment to slightly lower yielding
short-term investments.
Total deposits were $504.6 million at June 30, 1999 compared to $489.4
million at December 31, 1998, an increase of $15.2 million, or 3.1%. Money
market savings accounts increased by $20.7 million, or 11.9%, while certificates
of deposit declined by $7.8 million, or 3.2%, between the two dates. The current
economic environment prompted depositors to place more of their funds in
accounts with shorter maturities or immediate availability.
12
The Company increased its borrowings from the Federal Home Loan Bank of
Boston ("FHLB") from $94.4 million at December 31, 1998 to $109.3 million at
June 30, 1999 as part of its efforts to manage interest rate risk. As loan
customers have sought to lock in fixed rates of interest for several years, the
Company has extended its use of borrowings with maturities in the five year
range.
Total stockholders' equity increased from $278.2 million at December 31,
1998 to $279.5 million at June 30, 1999. For the first six months of 1999, net
income was $10.3 million and cash dividends paid to stockholders were $2.9
million, or $0.10 per share. During the six months ended June 30, 1999, the
Company purchased 558,200 shares of the Company's common stock in the open
market at an aggregate cost of $6.4 million, or $11.48 per share. Such purchases
were made in connection with a stock repurchase plan approved by regulators on
October 20, 1998 allowing the Company to repurchase 1,454,750 shares, or 5.0%,
of the total common shares outstanding. As of June 30, 1999, 671,700 shares were
purchased at an aggregate cost of $7.7 million, or $11.50 per share.
At the annual meeting of stockholders on April 15, 1999, the
stockholders approved the Company's 1999 Stock Option Plan and the 1999
Recognition and Retention Plan. See note 8 to the unaudited consolidated
financial statements on pages 10 and 11 herein for information regarding the
approved plans.
Unrealized gains on securities available for sale are reported as
accumulated other comprehensive income. Such gains amounted to $21.1 million
($13.3 million on an after-tax basis) at June 30, 1999 and $23.2 million ($14.4
million on an after-tax basis) at December 31, 1998. The net decrease is after
realization of $3.6 million ($2.1 million on an after-tax basis) of gains from
sales of marketable equity securities during the six months ended June 30, 1999.
NON-PERFORMING ASSETS, RESTRUCTURED LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table sets forth information regarding non-performing
assets, restructured loans and the allowance for loan losses:
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Mortgage loans:
Commercial ............................................. $ 292 $ 297
Home equity ............................................ -- 35
--------- ---------
Total non-accrual loans 292 332
Other real estate owned, net of allowance
for losses of $186 and $186, respectively ................ 1,919 1,940
--------- ---------
Total non-performing assets .......................... $ 2,211 $ 2,272
--------- ---------
--------- ---------
Restructured loans ......................................... $ -- $ --
--------- ---------
--------- ---------
Allowance for loan losses .................................. $ 13,399 $ 13,094
--------- ---------
--------- ---------
Allowance for loan losses as a percent
of total loans ........................................... 2.15% 2.21%
Allowance for loan losses as a percent
of total loans, excluding money market
participation loans ...................................... 2.24 2.39
Non-accrual loans as a percent of total loans .............. 0.05 0.06
Non-performing assets as a percent of
total assets ............................................. 0.24 0.26
13
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 $1.3 million at June 30, 1999 and December 31, 1998.
None of the impaired loans at those dates required a specific allowance for
impairment due primarily to prior charge-offs and/or the sufficiency of
collateral values.
During the six months ended June 30, 1999, recoveries of loans
previously charged off amounted to $5,000 and loan charge-offs were less than
$1,000. Despite net loan recoveries and a continued low level of non-performing
loans, the Company increased its allowance for loan losses by providing $150,000
as a charge to earnings in each of the first and second quarters of 1999.
Management deemed it prudent to increase the allowance in light of the $50.6
million increase in net loans outstanding (exclusive of money market loan
participations), most of which occurred in the higher risk categories of
multi-family and commercial real estate mortgage loans and commercial loans.
While management believes that, based on information currently
available, the allowance for loan losses is sufficient to cover losses inherent
in the Company's loan portfolio at this time, no assurance can be given that the
level of allowance will be sufficient to cover future loan losses or that future
adjustments to the allowance will not be necessary if economic and/or other
conditions differ substantially from the economic and other conditions
considered by management in evaluating the adequacy of the current level of the
allowance.
In March 1999, four federal banking agencies and the Securities and
Exchange Commission announced they had formed a working group to come up with
new guidelines for the documentation, disclosure and reporting of bank loan loss
reserves because of "continued uncertainty among financial institutions as to
the expectations of the banking and securities regulators" on how banks should
calculate and report loan loss reserves. Within one year, the working group
expects to issue guidance regarding (1) the procedures necessary for a reasoned
assessment of losses inherent in a loan portfolio, (2) documentation that should
exist to support the allowance and (3) enhanced disclosure of credit loss
allowances, including changes in risk factors and asset quality that affect
allowances for credit losses. It is not possible at this time to anticipate what
effect, if any, guidelines developed by the working group will have on the
financial condition or operating results of the Company.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS
ENDED JUNE 30, 1999 AND 1998
GENERAL
Operating results are primarily dependent on the Company's net interest
income, which is the difference between the interest earned on the Company's
loan and investment portfolios and the interest paid on deposits and borrowings.
Operating results are also affected by provisions for loan losses, the level of
income from non-interest sources such as service fees and sales of investment
securities and other assets, operating expenses and income taxes. Operating
results are also significantly affected by general economic conditions,
particularly changes in interest rates, as well as government policies and
actions of regulatory authorities.
Net income for the three months ended June 30, 1999 was $5.2 million
($0.18 per share) compared to $5.1 million ($0.18 per share) for the three
months ended June 30, 1998. The 1999 period included $2.4 million of gains from
sales of marketable equity securities ($1.4 million on an after-tax basis, or
$0.05 per share) compared to $1.2 million ($768,000 on an after-tax basis, or
$0.03 per share) in the 1998 period. The 1999 period also included $1.3 million
of expense ($823,000 on an after-tax basis, or $0.03 per share) related to the
recognition and retention plan approved by the stockholders on April 15, 1999.
(See note 8 to the unaudited consolidated financial statements on pages 10 and
11 herein). Excluding securities gains and recognition and retention plan
expense, net income was $4.5 million ($0.16 per share) in the 1999 period, or
3.8% higher than the $4.4 million ($0.15 per share) in the 1998 period.
14
Interest rate spread (the difference between yields earned on assets and
rates paid on deposits and borrowings) declined from 2.69% in the second quarter
of 1998 to 2.62% in the second quarter of 1999. The average yield on assets
declined from 7.45% in the 1998 period to 7.16% in the 1999 period. A falling
interest rate environment resulted in lower yields on new loan originations and
investment purchases and a higher volume of prepayments of loans originated in
prior years at higher rates. The overall decline in yield on earning assets was
partially offset by a reduction in the average rate paid on deposits and
borrowed funds from 4.76% in the 1998 period to 4.54% in the 1999 period.
INTEREST INCOME
The average balance of interest-earning assets increased by $75.1
million, or 9.1%, from $822.0 million in the second quarter of 1998 to $897.1
million in the second quarter of 1999. Loans (excluding money market loan
participations) accounted for 59.3% of total interest-earning assets in the
1998 period compared to 64.8% in the 1999 period. Upon the conversion to
stock in March 1998, the Company invested much of the conversion proceeds in
short-term investments and investment securities with relatively short
maturities. Since the conversion, the Company has sought to increase the
percent of total interest-earning assets represented by loans since loans
generate a higher yield than short-term investments and investment securities.
Interest income on loans, excluding money market loan participations,
was $11.8 million in the second quarter of 1999 compared to $10.6 million in the
second quarter of 1998, an increase of $1.2 million, or 11.1%. The additional
income resulting from an increase in average loans outstanding of $94.0 million,
or 19.3%, in the second quarter of 1999 compared to the second quarter of 1998
was partially offset by a decline in the average rate earned on loans from 8.69%
in the 1998 quarter to 8.09% in the 1999 quarter. The reduction in loan yield
was attributable to a falling interest rate environment. Historically, part of
the Company's loan portfolio was priced at adjustable rates tied to a published
prime rate. Cuts in the prime rate during the latter part of 1998 caused a
decline in the yield on the Company's adjustable rate loans. The falling rate
environment prompted some multi-family and commercial real estate borrowers to
convert their loans to fixed rate pricing for several years. Additionally, a
significant part of new loan production in the second half of 1998 and the first
half of 1999 was originated at prevailing market rates for fixed periods
averaging five to seven years. If interest rates increase during the fixed rate
phase of these new loans, net interest income could be negatively affected.
The average balance invested in money market loan participations during
the three months ended June 30, 1999 and 1998 were $37.1 million and $51.3
million, respectively, and the yields earned on those balances were 4.99% and
5.75%, respectively.
Interest income on short-term investments decreased 82.0% from $649,000
in the second quarter of 1998 to $117,000 in the second quarter of 1999 as a
result of substantially reduced average balances in such investments ($46.9
million in the 1998 period compared to $9.9 million in the 1999 period) and a
reduction in yields from 5.53% in the 1998 period to 4.74% in the 1999 period.
Interest income on debt securities increased 10.1% from $3.0 million in the 1998
period to $3.3 million in the 1999 period. The average balances invested in debt
securities increased 12.8% from $202.7 million to $228.5 million and the yields
earned on such securities were 5.96% and 5.82% in the comparable periods.
INTEREST EXPENSE
While the average balance of deposits increased by $31.5 million, or
6.9%, from $457.0 million in the second quarter of 1998 to $488.4 million in the
second quarter of 1999, the rates paid on such deposits declined from 4.50% in
the 1998 period to 4.20% in the 1999 period. As a result, interest expense on
deposits remained unchanged at $5.1 million in the 1999 and 1998 periods. Most
of the growth in deposits was in money market savings accounts.
The Company increased its use of borrowings from the FHLB as part of its
management of interest rate risk. The average balances of advances outstanding
were $110.0 million in the second quarter of 1999 compared to
15
$70.7 million in the second quarter of 1998 and the average rates paid on such
balances were 6.03% and 6.44%, respectively.
PROVISION FOR LOAN LOSSES
The Company provided $150,000 for loan losses in the second quarter of
1999 compared to $100,000 in the second quarter of 1998. The provisions were
made in light of the level of growth of the loan portfolio during those periods
of time.
NON-INTEREST INCOME
Gains on sales of marketable equity securities during the three months
ended June 30, 1999 and 1998 were $2.4 million and $1.2 million, respectively.
Marketable equity securities are held by the Company primarily for capital
appreciation and not for trading purposes. While the Company has enjoyed
attractive returns on its investment in marketable equity securities over a
long-time frame, there can be no assurance that attractive returns will continue
in the future. Fluctuations in the stock market can cause rapid significant
swings in investment returns.
The decrease in fees and charges from $305,000 in the second quarter of
1998 to $231,000 in the second quarter of 1999 resulted primarily from less
mortgage loan fees from late charges, prepayments and commitments.
NON-INTEREST EXPENSE
Excluding the $1.3 million of expense in the second quarter of 1999
resulting from the Company's recognition and retention plan addressed in earlier
sections of this document, total non-interest expense increased 6.3% from $2.3
million for the three months ended June 30, 1998 to $2.5 million for the three
months ended June 30. 1999. Most of the increase resulted from higher
compensation and employee benefits expense caused by additional personnel
relating to lending activities, added costs attributable to being a public
company (annual report and proxy costs, stock transfer fees, etc.), increased
depreciation expense resulting from upgrades of computer equipment and higher
marketing costs. Offsetting some of the increase in expense was a reduction in
Year 2000 compliance costs from $40,000 in the 1998 period to $3,000 in the 1999
period.
INCOME TAXES
The effective rate of income taxes was 35.4% in the second quarter of
1999 compared to 36.6% in the second quarter of 1998. The rate of state income
taxes was low in both quarters because of the existence of a real estate
investment subsidiary and utilization of investment security subsidiaries.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
GENERAL
Net income for the six months ended June 30, 1999 was $10.3 million
($0.36 per share) compared to $8.9 million (per share data not applicable since
the Company converted to stock on March 24, 1998). The 1999 period included $3.6
million of gains from sales of marketable equity securities ($2.1 million on an
after-tax basis, or $0.07 per share) compared to $1.2 million ($773,000 on an
after-tax basis) in the 1998 period. The 1999 period also included $1.3 million
of expense ($823,000 on an after-tax basis, or $0.03 per share) related to the
recognition and retention plan approved by the stockholders on April 15, 1999.
Excluding securities gains and recognition and retention plan expense, net
income was $9.0 million ($0.32 per share) in the 1999 period, or 11.0% higher
than the $8.1 million in the 1998 period.
Interest rate spread declined from 2.91% in the 1998 period to 2.63% in
the 1999 period. The average yield on assets declined from 7.55% in the 1998
period to 7.18% in the 1999 period primarily because of lower yields on existing
loans, loan originations, short-term investments and newly acquired investment
securities caused by a
16
falling interest rate environment. In addition, average deposit balances of
$44.0 million were held by the Company during the first quarter of 1998 in
connection with subscriptions for stock in the Offering. The rate paid on such
funds was 2.50% while the average rate earned from investing the funds in
short-term investments during the same period was 5.41%. The average rate paid
on deposits, borrowed funds and the stock subscription proceeds was 4.64% in the
first six months of 1998 compared to an average rate of 4.55% paid on deposits
and borrowed funds in the first six months of 1999. Excluding the funds from
stock subscriptions, the average rate paid on deposits and borrowed funds in the
first six months of 1998 would have been 4.73%, or 9 basis points higher than
the actual rate paid.
INTEREST INCOME
The average balance of interest-earning assets increased by $102.5
million, or 13.0%, from $787.3 million in the first half of 1998 to $889.8
million in the first half of 1999. Loans (excluding money market loan
participations) accounted for 61.1% of total interest-earning assets in the 1998
period compared to 64.2% in the 1999 period. The increase was attributable to
the same reason cited in the section of this filing comparing second quarter
1999 operating results to second quarter 1998 operating results.
Interest income on loans, excluding money market loan participations,
was $23.3 million in the 1999 period compared to $21.1 million in the 1998
period, an increase of $2.2 million, or 10.2%. The additional income resulting
from an increase in average loans outstanding of 90.3 million, or 18.8%, in the
1999 period compared to the 1998 period was partially offset by a decline in the
average rate earned on loans from 8.78% in the 1998 period to 8.15% in the 1999
period. The reduction in loan yield was attributable to a falling interest rate
environment.
The average balances invested in money market loan particpations during
the six months ended June 30, 1999 and 1998 were $38.5 million and $46.6
million, respectively, and the yields earned on those balances were 5.03% and
5.69%, respectively.
Interest income on short-term investments decreased 68.0% from $1.1
million in the 1998 period to $355,000 in the 1999 period as a result of
substantially reduced average balances in such investments ($40.6 million in the
1998 period compared to $14.8 million in the 1999 period) and a reduction in
yields from 5.48% in the 1998 period to 4.81% in the 1999 period. Interest
income on debt securities increased 18.9% from $5.6 million in the 1998 period
to $6.6 million in the 1999 period. The average balances invested in debt
securities increased 22.2% from $186.3 million to $227.6 million and the yields
earned on such securities were 5.97% and 5.81% in the comparable periods.
INTEREST EXPENSE
Excluding the average balance of deposits associated with the Offering
of $22.0 million in the first half of 1998, the average balance of all other
deposits increased by $17.5 million, or 3.7%, from $467.9 million in the 1998
period to $485.3 million in the 1999 period. The average rate paid on deposits
(excluding those associated with the Offering) was 4.49% in the 1998 period and
4.23% in the 1999 period. Most of the growth in deposits was in money market
savings accounts.
The Company increased its use of borrowings from the FHLB as part of its
management of interest rate risk. The average balances of advances outstanding
were $103.9 million in the first half of 1999 compared to $68.4 million in the
first half of 1998 and the average rates paid on such balances were 6.03% and
6.40%, respectively.
PROVISION FOR LOAN LOSSES
The Company provided $300,000 for loan losses in the first half of 1999
compared to $100,000 in the first half of 1998. The provisions were made in
light of the level of growth of the loan portfolio during those periods of time.
17
NON-INTEREST INCOME
Gains on sales of marketable equity securities in the first half of 1999
and 1998 were $3.6 million and $1.2 million, respectively. The decrease in fees
and charges from $587,000 in the first half of 1998 to $438,000 in the first
half of 1999 resulted primarily from less mortgage loan prepayment and
commitment fees.
NON-INTEREST EXPENSE
Excluding the $1.3 million of expense in the first half of 1999
resulting from the Company's recognition and retention plan, total non-interest
expense increased 9.4% from $4.5 million in the first half of 1998 to $4.9
million in the first half of 1999. Most of the increase resulted from higher
compensation and employee benefits expense caused by additional personnel
relating primarily to lending activities and a larger provision for the
Company's employee stock ownership plan ("ESOP"). The ESOP, which went into
effect in the second quarter of 1998, resulted in expense of $183,000 in the
first half of 1999 compared to $109,000 in the first half of 1998. Also
contributing to the higher level of expense in 1999 were increased costs
attributable to being a public company, increased depreciation expense resulting
from upgrades of computer equipment and increased marketing costs. Offsetting
some of these increases was a reduction in Year 2000 compliance costs from
$50,000 in the 1998 period to $6,000 in the 1999 period.
INCOME TAXES
The effective rate of income taxes was 35.7% in the first half of 1999
compared to 36.3% in the first half of 1998. Both periods benefitted from low
state income taxes resulting from the existence of a real estate investment
subsidiary and utilization of investment security subsidiaries.
ASSET/LIABILITY MANAGEMENT
The Bank's Asset/Liability Committee is responsible for managing
interest rate risk and reviewing with the Board of Directors on a quarterly
basis its activities and strategies, the effect of those strategies on the
Bank's operating results, the Bank's interest rate risk position and the effect
changes in interest rates would have on the Bank's net interest income.
Generally, it is the Bank's policy to reasonably match the rate
sensitivity of its assets and liabilities. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. Also taken into
consideration are interest rate swap agreements entered into by the Bank. At
June 30, 1999, interest-earning assets maturing or repricing within one year
amounted to $380.9 million and interest-bearing liabilities maturing or
repricing within one year amounted to $454.2 million resulting in a cumulative
one-year negative gap position of $73.3 million, or 8.1% of total assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and
interest payments on loans and debt securities and borrowings from the FHLB. In
March 1998, $134.8 million of net proceeds from the Offering added significantly
to the funds available to the Company for use in conducting its business. While
maturities and scheduled amortization of loans and investments are predictable
sources of funds, deposit flows and mortgage loan prepayments are greatly
influenced by interest rate trends, economic conditions and competition.
18
During the past few years, the combination of generally low interest
rates on deposit products and the attraction of alternative investments such as
mutual funds and annuities has resulted in little growth or a net decline in
deposits in certain time periods. Based on its monitoring of historic deposit
trends and its current pricing strategy for deposits, management believes the
Company will retain a large portion of its existing deposit base.
From time to time, the Company utilizes advances from the FHLB primarily
in connection with its management of the interest rate sensitivity of its assets
and liabilities. During the six months ended June 30, 1999, the Company repaid
advances of $12.6 million and obtained new advances of $27.5 million. Total
advances outstanding at June 30, 1999 amounted to $109.3 million.
The Company's most liquid assets are cash and due from banks, short-term
investments, debt securities and money market loan participations that generally
mature within 90 days. At June 30, 1999, such assets amounted to $74.8 million,
or 8.2% of total assets.
At June 30, 1999, the Company and the Bank exceeded all regulatory
capital requirements. The Bank's leverage capital was $207.3 million, or 25.1%
of adjusted assets. The minimum required leverage capital ratio is 3.00% to
5.00% depending on a bank's supervisory rating.
YEAR 2000 ("Y2K") COMPLIANCE
Changing from the year 1999 to 2000 has the potential to cause problems
in data processing and other date- sensitive systems, a problem known as the
Year 2000 or Y2K dilemma. The Year 2000 date change can affect any system that
uses computer software programs or computer chips, including automated equipment
and machinery. For example, many software programs or computer chips store
calendar dates as two-digit rather than four-digit numbers. These software
programs record the year 1998 as "98." This approach will work until the Year
2000 when "00" may be read as 1900 instead of 2000.
Regarding the Company, computer systems are used to perform financial
calculations, track deposits and loan payments, transfer funds and make direct
deposits. The processing of the Company's loan and deposit transactions is
outsourced to a third-party data processing vendor. Computer software and
computer chips also are used to run security systems, communications networks
and other essential bank equipment. Because of its reliance on these systems
(including those used by its third-party data processing vendor), the Company is
following a comprehensive process to assure that such systems are ready for the
Year 2000 date change.
To become Y2K compliant, the Company is following a five-step process
suggested by federal bank regulatory agencies. A description of each of the
steps and the status of the Company's efforts in completing the steps is as
follows:
Step 1. AWARENESS AND UNDERSTANDING OF THE PROBLEM. The Company has formed
a Year 2000 team that has investigated the problem and its potential impact on
the Company's systems. An independent consulting firm was engaged to assist the
Company in development of its approach to becoming Y2K compliant. This phase
also includes education of the Company's employees and customers about Y2K
issues. The awareness and
19
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. Any new
hardware or software that may be purchased during 1999 will be evaluated for Y2K
compliance.
Step 3. ASSESSMENT AND PLANNING. The Y2000 team has completed its
assessment of which systems and equipment are most prone to placing the Company
at risk if they are not Y2K compliant. The project team has developed an
inventory of its vendors, an inventory of actions to be taken, identification of
the team members responsible for completion of each action, a completion
timetable and a project tracking methodology. Significant vendors have been
requested to advise the Company in writing of their Y2K readiness, including
actions to become compliant if they are not already compliant. A plan has been
developed to repair or replace systems and equipment not currently Y2K
compliant. This step is considered complete.
Step 4. CORRECTION AND TESTING. The Company's third party data
processing servicer as well as vendors who provide significant
technology-related services have modified their systems to become Y2K compliant.
The Company has developed scripts involving typical transactions to test the
proper functioning of the modified systems. It has also arranged for repair or
replacement of equipment programs affected by Y2K issues. All of the testing and
corrections are complete. The monitoring of certain third party vendors will
continue throughout 1999.
Step 5. IMPLEMENTATION. This step includes repair or replacement of
systems and computer equipment and the development of contingency plans. The
repair and replacement phase is substantially completed. Development of
contingency plans for how the Company would resume business if unanticipated
problems arise from non-performance by IT and non-IT vendors has been completed.
Training of employees and testing of the contingency plans will take place in
the second half of 1999.
The Company's efforts to become Y2K compliant are being monitored by its
federal banking regulators. Failure to be Y2K compliant could subject the
Company to formal supervisory or enforcement actions.
The Company expensed $130,000 in 1998, $10,000 of which was in the first
quarter, and $40,000 of which was in the second quarter. The Company expensed
$6,000 in the first six months of 1999. While the Company expects to incur
additional costs through 1999 to become Y2K compliant, it does not expect such
costs to be material to the operating expenses of the Company. Some of the costs
are not expected to be incremental to the Company, but rather represent new
equipment and software that would otherwise be purchased in the normal course of
the Company's business. 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 whom the Company is dependent, or other
unforeseen problems arise, the Y2K issue could have a material adverse effect on
the operations of the Company.
RECENT DEVELOPMENTS
INTERNET HOME BANKING OFFERED BY BROOKLINE SAVINGS BANK
The Company has entered into a three year contractual arrangement with
Digital Insight Corporation ("Digital Insight"), a provider of real-time,
internet-based transaction services for financial institutions. Through Digital
Insight, the Company commenced offering to its existing customers internet home
banking and bill payment services in July 1999. Digital Insight has entered into
similar contractual relationships with numerous other financial institutions
throughout the United States. Digital Insight has advised the Company in writing
that the
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systems it uses to provide the contemplated services are Year 2000 compliant.
While this new service offering is not expected to have a significant impact on
the Company's 1999 operating results, it is not possible to predict how much the
Company's customers will use the new services.
ESTABLISHMENT OF A NEW INTERNET BANK SUBSIDIARY
On July 15, 1999, the Company announced its intention to establish a new
internet bank subsidiary that is expected to commence operations early next
year. An application requesting regulatory approval should be filed within the
next month or two. Thomas R. Venables and Claire S. Bean will be the executive
officers responsible for operating the new bank. Mr. Venables was the chief
executive officer and Ms. Bean was the chief operating officer of Grove Bank
prior to acquisition of that bank by Citizens Bank.
Pre-tax expenses in the range of $500,000 to $1 million to start up the
new subsidiary will be charged to the Company's expenses in the second half of
1999. It is also contemplated that the new subsidiary will operate at a loss in
its first two years of operations. While it is not possible to estimate the
amount of losses that will be incurred, the Company expects to continue to
report net income on a consolidated basis while the new subsidiary grows to a
sufficient size to operate profitably on a stand-alone basis.
Establishment of this new subsidiary is viewed as a strategic initiative
that should provide a meaningful way to leverage part of the capital that was
raised in the Offering in March 1998. The new bank is not expected to compete
with the electronic home banking and bill paying services introduced by
Brookline Savings Bank to its customers as of July 1, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
For a discussion of the Company's management of market risk exposure,
see "Asset/Liability Management" in Item 2 of Part 1 of this report and pages 12
through 14 of the Company's Annual Report incorporated by reference in Part II
item 7A of Form 10-K for the fiscal year ended December 31, 1998.
For quantitative information about market risk, see pages 12 through 14
of the Company's 1998 Annual Report.
There have been no material changes in the quantitative disclosures
about market risk as of June 30, 1999 from those presented in the Company's 1998
Annual Report.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any litigation, nor
is the Company aware of any pending litigation, other than legal proceedings
incident to the business of the Company. Management believes the results of any
current pending litigation would be immaterial to the consolidated financial
condition or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 15, 1999, the Company held its annual meeting of stockholders
for the purpose of the election of five Directors to three year terms and the
approval of the Company's 1999 Stock Option Plan and 1999 Recognition and
Retention Plan. The Bank's Board of Directors is currently composed of fifteen
members. The Bank's by-laws provide that approximately one-third of the
directors are to be elected annually. Directors of the Bank are generally
elected to serve for a three-year period or until their respective successors
shall have been elected and shall qualify.
The number of votes cast at the meeting as to each matter acted upon was as
follows:
NO. OF NO. OF
VOTES FOR VOTES WITHHELD
--------- --------------
1. Election of Directors
George C. Caner Jr. ............ 26,296,517 355,071
Richard P. Chapman Jr. ......... 26,298,042 353,546
Edward D. Rowley ............... 26,269,107 382,481
William V. Tripp, III .......... 26,273,507 378,081
Peter O. Wilde ................. 26,273,507 378,081
NO. OF NO. OF NO. OF
VOTES FOR VOTES AGAINST VOTES ABSTAINING
--------- ------------- ----------------
2. Approval of the Company's
1999 Stock Option Plan ...................... 19,608,128 1,998,341 134,032
NO. OF NO. OF NO. OF
VOTES FOR VOTES AGAINST VOTES ABSTAINING
--------- ------------- ----------------
3. Approval of the Company's
1999 Recognition and Retention Plan ......... 20,527,864 1,068,074 144,563
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
All required exhibits are included in Part I under Financial Statements
(Unaudited) and Management's Discussion and Analysis of Operations, and are
incorporated by reference, herein.
There were no reports filed on Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
BROOKLINE BANCORP, INC.
Date: August 10, 1999 By: /s/ Richard P. Chapman, Jr.
-------------------------------------
Richard P. Chapman, Jr.
President and Chief Executive Officer
Date: August 10, 1999 By: /s/ Paul R. Bechet
-------------------------------------
Paul R. Bechet
Senior Vice President and
Chief Financial Officer
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