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 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from ___________________ to ____________________
Commission File Number: 0-23695
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BROOKLINE BANCORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Massachusetts 04-3402944
- ------------------------------------------------------------ ---------------------------------------
State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
160 Washington Street, Boookline, MA 02147
- ------------------------------------------------------------ ---------------------------------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(617) 730-3500
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(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 $.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 twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES NO X
----- ------
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 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. [X]
As of March 25, 1998, there were issued and outstanding 29,095,000 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Brookline Bancorp, Inc.
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 into the
mutual holding company structure. The reorganization and the initial public
offering of common stock by the Company associated with the reorganization were
consummated on March 24, 1998, and accordingly, had not been consummated by
December 31, 1997, the end of the 12-month period for which this Annual Report
on Form 10-K is filed. Prior to the consummation of the reorganization, the
Company had no assets or liabilities. Following consummation of the
reorganization, the Company's only significant assets are 100% of the shares of
the Bank's outstanding common stock, the Company's loan to the Bank's employee
stock ownership plan and up to 50% of the net proceeds of the Company's initial
public stock offering.
The Company does not intend to employ any persons other than certain
officers who are currently officers of the Bank, but will utilize the support
staff of the Bank from time to time. Additional employees will be hired as
appropriate to the extent the Company expands its business in the future. The
directors and executive officers of the Company are set forth below.
The Company's offices are located at the executive offices of the Bank
at 160 Washington Street, Brookline, Massachusetts 02147. Its telephone number
is (617) 730-3500.
The consolidated financial statements of the Company consist of the
accounts of the Company and its wholly-owned subsidiary, the Bank (along with
the Bank's subsidiaries). Accordingly, filed herewith as Exhibit 99.1 for
informational purposes only are the consolidated financial statements of the
Bank and its subsidiaries, along with management's discussion and analysis of
such consolidated financial statements, as of December 31, 1997 and 1996 and for
the years ended December 31, 1997, 1996 and 1995.
<PAGE>
Directors and Executive Officers of the Registrant
The following individuals serve as directors and executive officers of
the Company:
(a) Directors of the Company
<TABLE>
<CAPTION>
Date
elected to
Age at Bank's
August 31, Term Board
Name 1997 expires of Trustees
- --------------------------- ------ ------- -----------
<S> <C> <C> <C>
Oliver F. Ames 76 2000 1973
Dennis S. Aronowitz 66 2000 1991
George C. Caner, Jr. 71 1999 1966
David C. Chapin 61 1998 1989
Richard P. Chapman, Jr. 62 1999 1972
William G. Coughlin 65 2000 1976
John L. Hall, II 57 1998 1983
Charles H. Peck 56 1998 1995
Hollis W. Plimpton, Jr. 67 1998 1974
Edward D. Rowley 79 1999 1966
Joseph J. Slotnik 61 2000 1970
William V. Tripp, III 59 1999 1975
Rosamond B. Vaule 59 1998 1989
Peter O. Wilde 58 1999 1993
Franklin Wyman, Jr. 76 1998 1974
</TABLE>
(b) Executive Officers of the Company
<TABLE>
<CAPTION>
Name Age* Position
- ----------------------- ---- --------
<S> <C> <C>
Richard P. Chapman, Jr. 62 President and Chief Executive Officer
Charles H. Peck 56 Executive Vice President
Paul R. Bechet 55 Senior Vice President and Chief Financial Officer
Susan M. Ginns 52 Senior Vice President and Treasurer
George C. Caner, Jr. 71 Clerk
</TABLE>
- ----------------
*As of August 31, 1997
2
<PAGE>
(c) Biographical Information
Directors of the Company
Oliver F. Ames has served as a Trustee of the Bank since 1973 and a
member of the Board of Investment of the Bank since 1974. Mr. Ames serves on the
board of directors of a number of civic and charitable organizations. From 1962
through 1970, Mr. Ames served as a State Senator.
Dennis S. Aronowitz has served as a Trustee of the Bank since 1991. In
1996, Mr. Aronowitz, an attorney, retired from Boston University where he served
on the faculty of the Law School since 1967 and was Director of the Banking Law
Center and Graduate Banking Law programs. He also is a trustee of a number of
John Hancock mutual funds.
George C. Caner, Jr. has served as a Trustee of the Bank since 1966 and
also serves as the Clerk of the Bank. Mr. Caner is an attorney at the law firm
of Ropes & Gray, where he was a partner from 1965 through 1996. Mr. Caner
currently is Of Counsel at the firm.
David C. Chapin has served as a Trustee of the Bank since 1989. Mr.
Chapin is President of Cameron Properties, a real estate investment, property
appraisal and management company, and has served in that capacity since 1975.
Richard P. Chapman, Jr. has served as a Trustee of the Bank since 1972
and has also served as President of the Bank since 1973 and Chief Executive
Officer since 1975. Mr. Chapman is also a trustee of a number of John Hancock
mutual funds, a director of Lumber Insurance Cos. and a trustee of Northeastern
University.
William G. Coughlin has served as a Trustee of the Bank since 1976 and
became a member of the Board of Investment in 1997. Mr. Coughlin is a private
investor in commercial real estate.
John L. Hall, II has served as a Trustee of the Bank since 1983. Mr.
Hall is President of Hall Properties, Inc., a real estate investment, management
and development company, and has served in that capacity since 1989.
Charles H. Peck has served as a Trustee of the Bank since 1995. Mr.
Peck also is an Executive Vice President of the Bank and has served as the
Senior Loan Officer of the Bank since 1970.
Hollis W. Plimpton, Jr. has served as a Trustee of the Bank since 1974.
Reverend Plimpton is Rector of St. George's Anglican Church.
Edward D. Rowley has been a Trustee of the Bank since 1966 and also
serves as the Assistant Clerk of the Bank. Prior to his retirement, Mr. Rowley
was associated with a retail merchandising firm and served in an administrative
position at the Harvard Business School.
Joseph J. Slotnik has served as a Trustee of the Bank since 1970 and a
member of the Board of Investment since 1974. Mr. Slotnik is a private investor
and previously was managing partner of the Boston office of a brokerage and
investment firm.
3
<PAGE>
William V. Tripp, III has served as a Trustee since 1975. Mr. Tripp is
an attorney and partner at Sherburne, Powers and Needham, P.C., and has been
with that firm since 1968.
Rosamond B. Vaule has served as a Trustee of the Bank since 1989. Ms.
Vaule is active in volunteer work for various educational and charitable
organizations.
Peter O. Wilde has served as a Trustee of the Bank since 1993. In 1997,
Mr. Wilde became Managing Director of Beckwith Bemis Incorporated, a coatings
and finishing company. Previously, he was Vice President of Finance and
Administration at Ran Demo, Inc., a materials technology company, and served in
that position since 1991.
Franklin Wyman, Jr. has served as a Trustee of the Bank since 1974 and
became a member of the Board of Investment in 1979. Mr. Wyman is Chairman and
Treasurer of O'Conor, Wright, Wyman, Inc., a consulting firm providing advisory
services in mergers and acquisitions, where he has been since 1984. He is also a
director of Unitil Corporation, an electric utility company in New Hampshire,
and a director of Fitchburg Gas & Electric Company.
Executive Officers of the Company Who Are Not Directors
Susan M. Ginns is Senior Vice President and Treasurer of the Bank, a
position she has held since 1987. Her primary areas of responsibility include
retail banking, marketing and personnel.
Paul R. Bechet is Senior Vice President and Chief Financial Officer of
the Bank, a position he has held since June 1997. Mr. Bechet is a certified
public accountant who, prior to joining the Bank, was a partner at KPMG Peat
Marwick LLP since 1972. His primary areas of responsibility include financial
reporting and risk management.
ITEM 2. PROPERTIES
The Company conducts its business through its office at 160 Washington
Street, Brookline, Massachusetts.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings, claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 1997 to a vote of security holders.
4
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) The common stock of the Company is quoted on the Nasdaq National
Market under the symbol "BRKL". As of December 31, 1997, the date for which this
report is filed, there had been no trading in the common stock of the Company.
(b) The effective date of the Securities Act registration statement for
which use of proceeds information is being disclosed herein was January 12,
1998; the commission file number assigned to the registration statement was
333-40471.
The offering commenced on or about January 28, 1998 and continued
through March 3, 1998. The offering was managed on a best efforts basis by Ryan
Beck & Co., Inc., as marketing agent. The securities registered were the common
stock, par value $.01 per share, of the Company. In the registration statement,
15,539,050 shares of such common stock were registered at an aggregate price of
$155,390,500. In the offering, 29,095,000 shares of common stock were issued, of
which 13,674,650 shares were sold to the public at an aggregate purchase price
of $136,746,500, and 15,420,350 shares were issued to Brookline Bancorp, MHC,
the mutual holding company formed in the reorganization. In that the effective
date of the registration statement was subsequent to December 31, 1997, the
ending date of the reporting period for this report, the amount of expenses
incurred and the amount of net offering proceeds will be reported in the
Company's next periodic report filed pursuant to section 13(a) and 15(b) of the
Securities Exchange Act of 1934. However, the final expenses of the
reorganization and offering are not expected to exceed $2.2 million.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Not applicable.
ITEM 8. FINANCIAL STATEMENTS
Not applicable.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
5
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
See Item 1. "Directors and Executive Officers of the Registrant" for
information concerning the Company's directors and executive officers.
ITEM 11. EXECUTIVE COMPENSATION
See Item 1. for information concerning executive compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Not applicable.
ITEM 13. CERTAIN TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
(a)(3) Exhibits
99.1 Consolidated Financial Statements of Brookline
Savings Bank and subsidiaries as of December 31, 1997
and 1996 and for the years ended December 31, 1997,
1996 and 1995, with Report of Independent Certified
Public Accountants, along with management's
discussion and analysis of such Consolidated
Financial Statements.
(b) Reports on Form 8-K:
The Registrant filed no Current Report on Form 8-K during the
fourth quarter of 1997.
6
<PAGE>
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 27, 1998 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.
<TABLE>
<S> <C>
By: /s/ Richard P. Chapman, Jr. By: /s/ Paul R. Bechet
---------------------------------------------- --------------------------------------------
Richard P. Chapman, Jr., President, Chief Paul R. Bechet, Treasurer
Executive Officer and Director (Principal Financial and Accounting Officer)
(Principal Executive Officer)
Date: March 27, 1998 Date: March 27, 1998
By: /s/ Oliver F. Ames By: /s/ Charles H. Peck
--------------------------------------- ---------------------------------------
Oliver F. Ames, Director Charles H. Peck, Director
By: /s/ Dennis S. Aronowitz By: /s/ Hollis W. Plimpton, Jr.
--------------------------------------- ---------------------------------------
Dennis S. Aronowitz, Director Hollis W. Plimpton, Jr., Director
By: /s/ George C. Caner, Jr. By: /s/ Edward D. Rowley
--------------------------------------- ---------------------------------------
George C. Caner, Jr., Director Edward D. Rowley, Director
By: /s/ David C. Chapin By: /s/ Joseph J. Slotnik
--------------------------------------- ---------------------------------------
David C. Chapin, Director Joseph J. Slotnik, Director
By: /s/ Richard P. Chapman, Jr. By: /s/ William V. Tripp, III
--------------------------------------- ---------------------------------------
Richard P. Chapman, Jr., 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/ Franklin Wyman, Jr.
---------------------------------------
Franklin Wyman, Jr., Director
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
report. The Bank'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
regulatory authorities and competition.
Comparison of Financial Condition at December 31, 1997 and December 31, 1996
Total assets were $701.1 million at December 31, 1997 compared to $667.0
million at December 31, 1996, an increase of $34.1 million, or 5.1%. This growth
resulted primarily from a $15.7 million, or 3.3% increase in net loans
outstanding and a $16.1 million, or 8.8%, increase in investments. Asset growth
was funded primarily by an $8.7 million, or 14.4%, increase in borrowed funds
and an $18.8 million, or 16.5%, increase in retained earnings.
Of the $16.1 million increase in investments between December 31, 1997 and
December 31, 1996, $8.4 million was attributable to higher unrealized gains on
the Bank's marketable equity securities portfolio. Securities held to maturity
increased by $23.8 million and short-term investments declined by $8.2 million
between those respective dates. This shift resulted from the Bank's decision to
improve investment yields by reducing excess liquidity and increasing its
holdings of corporate obligations. Most of the debt securities purchased had
maturities in the range of two years.
The net increase in loans resulted from greater mortgage loan originations
and less purchases of commercial loan participations. From December 31, 1996 to
December 31, 1997, the most significant areas of growth were in one-to-four
family mortgage loans ($11.2 million, or 19.4%), multi-family mortgage loans
($19.5 million, or 9.8%), commercial real estate mortgage loans ($10.1 million,
or 7.3%) and construction and development mortgage loans ($6.1 million, or
84.3%). These increases were partially offset by a $29.0 million decrease in
commercial loan participations and a modest net decrease in other loan
categories. Commercial loan 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 Bank views such participations as an alternative investment to
slightly lower-yielding short-term investments.
Total deposits declined by $1.7 million, or 0.4%, from $484.0 million at
December 31, 1996 to $482.3 million at December 31, 1997. The modest reduction
in deposits resulted from continuation of a low interest rate environment
wherein the Bank has had to compete against other instruments available to the
public such as mutual funds and annuities. The decrease in deposits was more
than offset by an $8.7 million increase in funds borrowed from the FHLB.
The increase in retained earnings to $132.8 million at December 31, 1997,
or 18.9% of total assets, resulted from net earnings of $13.7 million for the
year ended December 31, 1997 and a $5.1 million increase in unrealized gains
(net of taxes) on securities available for sale.
<PAGE>
Average Balance Sheets and Interest Rates
The following table sets forth certain information relating to the Bank
for the years ended December 31, 1997, 1996 and 1995. 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.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------ -----------------------------
Average Average Average
Average yield/ Average yield/ Average yield/
balance Interest(1) cost balance Interest(1) cost balance Interest(1) cost
-------- ----------- -------- -------- ----------- ------- ------- ----------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments........ $ 9,657 $ 522 5.41% $ 14,562 $ 765 5.25% $ 2,511 $ 145 5.77%
Debt securities (2)........... 147,282 8,873 6.02 135,039 8,115 6.01 154,736 8,963 5.79
Equity securities (2)......... 26,255 1,196 4.56 21,746 1,142 5.25 18,387 1,110 6.04
Mortgage loans (3)(4)......... 441,625 39,648 8.98 415,054 37,765 9.10 392,509 36,366 9.27
Commercial participation
loans (3) .................. 43,631 2,491 5.71 54,076 3,007 5.56 35,766 2,166 6.06
Other commercial loans (3).... 6,201 625 10.08 3,792 345 9.10 2,624 271 10.33
Consumer loans (3)............ 1,176 122 10.37 1,098 134 12.20 1,338 146 10.91
--------- ------- -------- ------- -------- -------
Total interest-earning
assets................... 675,827 53,477 7.91 645,367 51,273 7.94 607,871 49,167 8.09
------- ------ ------- ------ ------- ----
Allowance for loan losses........ (12,428) (12,319) (12,247)
Non-interest earning assets...... 15,419 15,863 18,857
--------- -------- --------
Total assets............... $ 678,818 $648,911 $614,481
========= ======== ========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits:
NOW accounts............... $ 37,544 645 1.72% $ 37,095 641 1.73% 35,787 620 1.73%
Savings accounts (5)....... 15,063 377 2.50 17,302 426 2.46 20,460 498 2.43
Money market savings
accounts................. 158,578 6,109 3.85 154,541 5,957 3.85 151,334 5,665 3.74
Certificate of deposit
accounts................. 260,893 14,569 5.58 262,007 14,751 5.63 252,985 14,127 5.58
--------- ------- -------- ------- -------- -------
Total deposits........... 472,078 21,700 4.60 470,945 21,775 4.62 460,566 20,910 4.54
Borrowed funds................ 63,771 4,158 6.52 55,497 3,683 6.64 46,172 3,028 6.56
--------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............ 535,849 25,858 4.83 526,442 25,458 4.84 506,738 23,938 4.72
------- ------ ------- ----- ------- ----
Non-interest-bearing demand
checking accounts.............. 9,890 9,595 8,266
Other liabilities................ 10,343 5,808 6,553
--------- -------- --------
Total liabilities........ 556,082 541,845 521,557
Retained earnings................ 122,736 107,066 92,924
--------- -------- --------
Total liabilities and
retained earnings...... $ 678,818 $648,911 $614,481
========= ======== ========
Net interest income (tax
equivalent basis)/interest
rate spread (6)................ 27,619 3.08% 25,815 3.10% 25,229 3.37%
====== ===== ====
Less adjustment of tax exempt
income......................... 260 254 247
------- ------- -------
Net interest income (4).......... $27,359 $25,561 $24,982
======= ======= =======
Net interest margin (7).......... 4.09% 4.00% 4.15%
====== ===== ====
</TABLE>
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(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 year ended December 31, 1997 is $908
collected from a borrower whose loans were on non-accrual and which
relates to interest earned in periods prior to January 1, 1997.
(5) Savings accounts include interest-bearing mortgagors' escrow accounts.
(6) Net interest spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(7) Net interest margin represents net interest income (tax equivalent basis)
divided by average interest-earning assets.
<PAGE>
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.
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1997 December 31, 1996
compared to compared to
year ended year ended
December 31, 1996 December 31, 1995
---------------------------- --------------------------
Increase (decrease) Increase (decrease)
due to due to
------------------- -------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments........... $ (265) $ 22 $ (243) $ 634 $ (14) $ 620
Debt securities.................. 738 20 758 (1,174) 326 (848)
Equity securities................ 218 (164) 54 187 (155) 32
Mortgage loans................... 2,391 (508) 1,883 2,060 (661) 1,399
Commercial participation loans... (594) 78 (516) 1,031 (190) 841
Other commercial loans........... 239 41 280 109 (35) 74
Consumer loans................... 9 (21) (12) (28) 16 (12)
------- ----- ------ ------- ------- ------
Total interest-earning assets. 2,736 (532) 2,204 2,819 (713) 2,106
------- ----- ------ ------- ------- ------
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits:
NOW accounts.................. 8 (4) 4 23 (2) 21
Savings accounts.............. (56) 7 (49) (78) 6 (72)
Money market savings accounts. 156 (4) 152 122 170 292
Certificate of deposit accounts (63) (119) (182) 507 117 624
------- ----- ------ ------- ------- ------
Total deposits.............. 45 (120) (75) 574 291 865
Borrowed funds................... 541 (66) 475 618 37 655
------- ----- ------ ------- ------- ------
Total interest-bearing
liabilities 586 (186) 400 1,192 328 1,520
------- ----- ------ ------- ------- ------
Net change in net interest income... $ 2,150 $(346) $1,804 $ 1,627 $(1,041) $ 586
======= ===== ====== ======= ======= ======
</TABLE>
<PAGE>
Comparison of Operating Results For the Year 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 commercial 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,
1997, 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% in 1996.
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
<PAGE>
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 $892,000 in 1996 to $1.0
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 new
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 $100,000 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.
Comparison of Operating Results for the Years Ended December 31, 1996 and
December 31, 1995
General. Net income was $11.9 million in 1996 compared to $11.7 million in
1995, an increase of $209,000, or 1.8%. Despite an increase in average
interest-earning assets of $37.5 million, or 6.2%, net interest income increased
by only $579,000, or 2.3%, from $25.0 million in 1995 to $25.6 million in 1996
caused by a reduction in the Bank's interest rate spread from 3.37% in 1995 to
3.10% in 1996. The other significant factor affecting the change in net income
was a $342,000 increase in the Bank's income tax expense from $7.4 million in
1995 to $7.8 million in 1996.
Interest Income. Interest income was $51.0 million in 1996, compared to
$48.9 million in 1995, an increase of $2.1 million, or 4.3%. A $2.8 million
improvement in interest income resulting from interest-earning asset growth was
partially offset by a $713,000 decline resulting from lower yields. The average
yield on mortgage loans declined from 9.27% in 1995 to 9.10% in 1996 as a result
of a lower prime rate and the fact that a significant portion of the Bank's
mortgage loans are tied to the prime rate. As the prime rate decreased, some of
the Bank's commercial real estate borrowers refinanced their loans at fixed
rates for three to five year intervals so as to lock in more favorable interest
rates. Increased competition within the Bank's market area facilitated the
ability of borrowers to arrange such refinancings. In recognition of this trend
and to protect against possible negative consequences that would result from
further reductions in the prime rate, in 1996, the Bank placed more funds in
short-term investments and commercial loan participations rather than
longer-term debt securities. The yields on such short-term assets were lower in
1996 than in 1995. The decline in the yield on the Bank's equity securities from
6.04% in 1995 to 5.25% in 1996 was caused by the inclusion of the increased
unrealized appreciation on those securities in average asset balances.
Interest Expense. Interest expense increased by $1.5 million, or 6.3%,
from $23.9 million in 1995 to $25.4 million in 1996. The increase resulted from
a $19.7 million, or 3.9%, increase in average interest-bearing liabilities and a
12 basis point, or 2.5%, increase in the average rate paid on such liabilities.
Total average interest-bearing deposits increased by $10.4 million, or 2.3%,
with most of the increase occurring in certificates of deposit because of the
higher rates offered on such deposits in comparison to those offered on other
types of deposits. The strength of the stock market made investment in mutual
funds an attractive alternative deployment of funds for many customers. Because
of the level of loan refinancings at fixed rates
<PAGE>
for three-to-five year intervals, the Bank increased its borrowings from the
FHLB as part of interest rate risk management. The average amount of borrowings
outstanding increased by $9.3 million, or 20.2%, from $46.2 million in 1995 to
$55.5 million in 1996.
Provision for Loan Losses. The Bank made no provision for loan losses in
1996 and 1995 as all the significant factors considered by management in
evaluating the adequacy of the Bank's allowance for loan losses remained
positive. Non-performing loans were $1.3 million at the end of 1996 and $748,000
at the end of 1995, or 0.28% and 0.17% of total loans outstanding at those
respective dates. Loan recoveries ($166,000) equaled loan charge-offs in 1996
and exceeded loan charge-offs ($240,000) by $52,000 in 1995. The allowance for
loan losses was $12.3 million at the end of 1996 and 1995, or 2.56% and 2.75% of
total loans outstanding at those respective dates.
Non-Interest Income. Total non-interest income was $1.8 million in 1996,
an increase of $235,000, or 14.6%, from $1.6 million in 1995. The increase in
fees and charges from $759,000 in 1995 to $957,000 in 1996 was substantially
attributable to a $205,000 increase in prepayment fees caused by loan payments
and refinancings. Sales of marketable equity securities generated net gains of
$464,000 in 1996 compared to $877,000 in 1995. Other real estate owned activity
contributed income of $299,000 in 1996, compared to a loss of $40,000 in 1995,
as a result of gains from sales of properties ($149,000 in 1996 and none in
1995) and income from the rental of properties exceeding property expenses by
$150,000 in 1996, compared to a shortfall of $40,000 in 1995. Other income was
higher in 1996 than in 1995 primarily as a result of funds received in 1996 from
a settlement involving a loan-related dispute and the partial charge-off in 1995
of a miscellaneous receivable included in other assets.
Non-Interest Expense. Total non-interest expense was $7.7 million in 1996,
compared to $7.4 million in 1995, an increase of $263,000, or 3.5%. This
increase resulted in part from a $550,000 reduction in premiums paid to the FDIC
for deposit insurance. Some of this benefit was offset by an increase in
professional fees resulting from implementation of a tax strategy involving
creation of a real estate investment trust and a diagnostic review of the Bank's
risk management process. The increase in other expenses in 1996 was also
attributable to higher advertising and promotion costs and expenses incurred in
connection with the Bank's conversion to a new data processing system.
Income Taxes. Total income tax expense was $7.8 million in 1996 compared
to $7.4 million in 1995. The effective tax rate was higher in 1996 (39.4%) than
in 1995 (38.7%) primarily because the Bank was able to use capital loss
carryforwards in 1995 to reduce part of the tax due on gains from sales of
equity securities.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Trustees
Brookline Savings Bank:
We have audited the accompanying consolidated balance sheets of Brookline
Savings Bank and subsidiaries (the Bank) as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in retained earnings and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Bank'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
Savings Bank and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Boston, Massachusetts
February 13, 1998
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
---------------------
1997 1996
--------- ---------
ASSETS
Cash and due from banks ............................... $ 8,843 $ 6,465
Short-term investments ................................ 11,670 19,870
Securities available for sale ......................... 117,637 117,372
Securities held to maturity (market value of $65,600
and $41,695, respectively) .......................... 65,444 41,620
Restricted equity securities .......................... 3,721 3,481
Loans ................................................. 496,412 480,683
Allowance for loan losses ............................. (12,463) (12,326)
--------- ---------
Net loans ........................................ 483,949 468,357
--------- ---------
Accrued interest receivable ........................... 5,240 5,106
Bank premises and equipment, net ...................... 1,361 1,442
Other real estate owned, net .......................... 2,373 1,689
Deferred income tax asset, net ........................ -- 875
Other assets .......................................... 881 711
--------- ---------
Total assets ..................................... $ 701,119 $ 666,988
========= =========
LIABILITIES AND RETAINED EARNINGS
Deposits .............................................. $ 482,304 $ 484,016
Borrowed funds ........................................ 69,265 60,565
Mortgagors' escrow accounts ........................... 2,896 2,777
Income taxes payable .................................. 5,901 1,399
Deferred income tax liability, net .................... 2,041 --
Accrued expenses and other liabilities ................ 5,955 4,284
--------- ---------
Total liabilities ................................ 568,362 553,041
--------- ---------
Commitments and contingencies
Retained earnings:
Retained earnings ................................... 119,018 105,287
Net unrealized gain on securities available
for sale, net of taxes ............................ 13,739 8,660
--------- ---------
Total retained earnings .......................... 132,757 113,947
--------- ---------
Total liabilities and retained earnings .......... $ 701,119 $ 666,988
========= =========
See accompanying notes to the consolidated financial statements.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Interest income:
Loans ................................................... $ 43,794 $ 41,251 $ 38,949
Debt securities ......................................... 8,873 8,115 8,963
Marketable equity securities ............................ 715 697 678
Restricted equity securities ............................ 220 191 185
Short-term investments .................................. 523 765 145
-------- -------- --------
Total interest income ................................ 54,125 51,019 48,920
-------- -------- --------
Interest expense:
Deposits ................................................ 21,700 21,775 20,910
Borrowed funds .......................................... 4,158 3,683 3,028
-------- -------- --------
Total interest expense ............................... 25,858 25,458 23,938
-------- -------- --------
Net interest income ....................................... 28,267 25,561 24,982
Provision for loan losses ................................. -- -- --
-------- -------- --------
Net interest income after provision for loan losses .. 28,267 25,561 24,982
-------- -------- --------
Non-interest income:
Fees and charges ........................................ 792 957 759
Gains on sales of securities, net ....................... 74 464 877
Other real estate owned income (expense), net ........... 238 299 (40)
Other income ............................................ 61 120 9
-------- -------- --------
Total non-interest income ............................ 1,165 1,840 1,605
-------- -------- --------
Non-interest expense:
Compensation and employee benefits ...................... 5,081 4,513 4,395
Occupancy ............................................... 701 627 579
Equipment and data processing ........................... 1,041 892 882
Deposit insurance premiums .............................. 71 11 561
Other ................................................... 1,480 1,670 1,033
-------- -------- --------
Total non-interest expense ........................... 8,374 7,713 7,450
-------- -------- --------
Income before income taxes ................................ 21,058 19,688 19,137
Provision for income taxes ................................ 7,327 7,751 7,409
-------- -------- --------
Net income ........................................... $ 13,731 $ 11,937 $ 11,728
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
Years ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
Net
unrealized gain
on securities
available
Retained for sale,
earnings net of taxes Total
-------- ------------ -----
<S> <C> <C> <C>
Balance at December 31, 1994.............................. $ 81,622 $ 4,100 $ 85,722
Net income for the year ended December 31, 1995........ 11,728 -- 11,728
Change in net unrealized gain on securities
available for sale, net of taxes for the year ended
December 31, 1995.................................... -- 3,133 3,133
---------- --------- ----------
Balance at December 31, 1995.............................. 93,350 7,233 100,583
Net income for the year ended December 31, 1996........ 11,937 -- 11,937
Change in net unrealized gain on securities
available for sale, net of taxes for the year ended
December 31, 1996.................................... -- 1,427 1,427
---------- --------- ----------
Balance at December 31, 1996.............................. 105,287 8,660 113,947
Net income for the year ended December 31, 1997........ 13,731 -- 13,731
Change in net unrealized gain on securities
available for sale, net of taxes for the year ended
December 31, 1997.................................... -- 5,079 5,079
---------- --------- ----------
Balance at December 31, 1997.............................. $ 119,018 $ 13,739 $ 132,757
========== ========= ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................... $ 13,731 $ 11,937 $ 11,728
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses ............................... -- -- --
Provision for other real estate owned ................... -- -- --
Depreciation and amortization ........................... 450 261 227
Amortization, net of accretion, of securities premiums
and discounts ......................................... 633 526 1,226
Accretion of deferred loan origination fees
and unearned discounts ................................ (592) (619) (151)
Net gains from sales of securities ...................... (74) (464) (877)
Net gains from sales of other real estate owned ......... (12) (149) --
Deferred income taxes ................................... (302) 21 (272)
(Increase) decrease in:
Accrued interest receivable ........................... (134) 487 (629)
Other assets .......................................... (202) 6 198
Increase (decrease) in:
Income taxes payable .................................. 4,450 (640) 495
Accrued expenses and other liabilities ................ 1,671 330 606
--------- --------- ---------
Net cash provided by operating activities .......... 19,619 11,696 12,551
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale .......... 752 2,712 1,256
Proceeds from redemptions and maturities of securities
available for sale ......................................... 50,956 25,583 20,943
Proceeds from redemptions and maturities of securities
held to maturity ........................................... 21,693 110,400 48,159
Purchase of securities available for sale ..................... (43,651) (61,316) (27,241)
Purchase of securities held to maturity ....................... (46,049) (63,077) (39,499)
Purchase of Federal Home Loan Bank of Boston stock ............ (240) (613) (113)
Net increase in loans ......................................... (45,883) (28,644) (22,787)
Proceeds from sales of participations in loans ................ 1,198 5,965 3,000
Purchase of bank premises and equipment ....................... (344) (570) (218)
Capital expenditures on other real estate owned ............... (88) (17) (49)
Proceeds from sales of other real estate owned ................ 158 1,284 219
--------- --------- ---------
Net cash used for investing activities ................ (61,498) (8,293) (16,330)
--------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in demand deposits and NOW, savings and
money market savings accounts .............................. 3,982 8,918 (18,987)
Increase (decrease) in certificates of deposit ................ (5,694) 883 21,391
Proceeds from Federal Home Loan Bank of Boston advances ....... 25,792 22,796 19,900
Repayment of Federal Home Loan Bank of Boston advances ........ (17,092) (11,896) (13,500)
Increase in mortgagors' escrow accounts ....................... 119 403 114
--------- --------- ---------
Net cash provided by financing activities .......... 7,107 21,104 8,918
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............ (34,772) 24,507 5,139
Cash and cash equivalents at beginning of period ................ 79,285 54,778 49,639
--------- --------- ---------
Cash and cash equivalents at end of period ...................... $ 44,513 $ 79,285 $ 54,778
========= ========= =========
</TABLE>
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds.................. $ 25,813 $ 26,491 $ 23,727
Income taxes............................................. 3,309 8,361 7,190
Non-cash activities:
Transfers from loans to other real estate owned.......... 728 1,096 95
Transfer of investment securities from held to maturity
to available for sale................................. -- -- 25,952
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies and Related Matters
Brookline Savings Bank and its subsidiaries (collectively the "Bank") operate
five full service banking offices located in Brookline, Massachusetts. The
Bank's 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 Bank is subject to competition from other financial and
non-financial institutions. As a Massachusetts chartered savings bank whose
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") and
the Deposit Insurance Fund, the activities of the Bank are subject to
regulation, supervision and examination by federal and state authorities.
(a) Principles of Consolidation and Basis of Financial Statement
Presentation
The consolidated financial statements include the accounts of Brookline Savings
Bank and its wholly-owned subsidiaries, 160 Associates, Inc. ("Associates") and
BBS Investment Corporation ("BBS"). Through 1996, Associates 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. BBS is engaged in
buying, selling and holding investment securities. 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.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on unanticipated changes in
economic conditions, particularly in the Boston metropolitan area and eastern
Massachusetts. In addition, the FDIC and the Massachusetts Division of Banks, as
an integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
(b) 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 commercial loan
participations.
(c) 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.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
Trading account securities are carried at estimated fair value with unrealized
gains and losses included in earnings. None of the securities purchased by the
Bank have been classified as trading account securities.
Debt securities for which the Bank 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) are reported as a
separate component of retained earnings, net of related income taxes. Restricted
equity securities are carried at cost.
In November 1995, FASB issued an implementation guide for Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," that allowed banks a one-time opportunity from
mid-November 1995 to December 31, 1995 to reassess investment classifications
and reclassify securities in the held to maturity and available for sale
categories without tainting the remainder of the portfolio not reclassified. In
connection with this opportunity, the Bank reclassified $26.0 million of debt
securities from the held to maturity category to the available for sale
category. Retained earnings increased by $62,000 as a result of the
reclassification.
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.
(d) 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
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
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.
(e) 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.
(f) 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.
(g) 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.
(h) Employee Benefits
The Bank accounts for pension and post-retirement 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.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
(i) Income Taxes
The Bank 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.
(j) New Accounting Pronouncements
Effective January 1, 1997, the Bank adopted 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, and is to be applied
prospectively. 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. Earlier or
retroactive application of this Statement is not permitted. Adoption of SFAS No.
125 did not and SFAS No. 127 is not expected to have a significant effect on the
Bank's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This Statement requires entities presenting a complete set of financial
statements to include details of comprehensive income that arise in the
reporting period. Comprehensive income consists of net income or loss for the
current period and other comprehensive income consisting of revenue, expenses,
gains and losses that bypass the income statement and are reported directly in a
separate component of equity. Other comprehensive income includes, for example,
unrealized gains and losses on certain investment securities, minimum pension
liability adjustments and foreign currency items. This Statement requires that
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. At December
31, 1997, the Bank's other comprehensive income consisted of unrealized gains on
securities classified as available for sale. This Statement is effective for
fiscal years beginning after December 31, 1997 and requires restatement of prior
period financial statements presented for comparative purposes.
(2) Cash and Short-Term Investments (In Thousands)
Aggregate reserves (in the form of deposits with the Federal Reserve Bank and
vault cash) of $1,558 and $1,155 were maintained to satisfy federal regulatory
requirements at December 31, 1997 and 1996, respectively.
Short-term investments are summarized as follows:
December 31,
-------------------------
1997 1996
-------- --------
Money market funds......................... $ 7,570 $ 15,870
Federal funds.............................. 4,000 4,000
Term deposit............................... 100 --
-------- --------
$ 11,670 $ 19,870
======== ========
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
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.
(3) Investment Securities (In Thousands)
Securities available for sale and held to maturity are summarized below:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
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
======== ======== ======= =========
<CAPTION>
December 31, 1996
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations.................... $ 57,089 $ 101 $ 86 $ 57,104
Corporate obligations..................................... 39,890 73 60 39,903
-------- -------- ------- ---------
Total debt securities................................... 96,979 174 146 97,007
Marketable equity securities................................ 6,703 13,750 88 20,365
-------- -------- ------- ---------
Total securities available for sale..................... $103,682 $ 13,924 $ 234 $ 117,372
======== ======== ======= =========
Securities held to maturity:
U.S. Government and Agency obligations...................... $ 12,951 $ 3 $ 1 $ 12,953
Corporate obligations....................................... 25,905 45 15 25,935
Mortgage-backed securities.................................. 2,764 54 11 2,807
-------- -------- ------- ---------
Total securities held to maturity....................... $ 41,620 $ 102 $ 27 $ 41,695
======== ======== ======= =========
</TABLE>
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
Restricted equity securities are as follows:
December 31,
---------------------
1997 1996
-------- --------
Federal Home Loan Bank of Boston stock................... $ 3,468 $ 3,228
Massachusetts Savings Bank Life
Insurance Company stock................................ 253 253
-------- --------
$ 3,721 $ 3,481
======== ========
As a voluntary member of the Federal Home Loan Bank of Boston ("FHLB"), the Bank
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 Bank 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 $212, $183 and $178 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The maturities of the investments in debt securities at December 31, 1997 are as
follows:
Available for sale
--------------------------
Amortized Estimated
Maturity cost fair value
- -------- --------- ---------
Within 1 year...................................... $ 47,176 $ 47,224
After 1 year through 5 years....................... 42,054 42,206
After 5 years through 10 years..................... 199 190
-------- ---------
$ 89,429 $ 89,620
======== =========
Held to maturity
--------------------------
Amortized Estimated
Maturity cost fair value
- -------- --------- ---------
Within 1 year...................................... $ 20,854 $ 20,868
After 1 year through 5 years....................... 43,225 43,318
After 5 years through 10 years..................... 404 401
Over 10 years...................................... 961 1,013
-------- ---------
$ 65,444 $ 65,600
======== =========
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,
---------------------------------
1997 1996 1995
--------- --------- ------
Proceeds from sales....................... $ 752 $ 2,712 $ 1,256
Gross gains from sales.................... 74 469 1,006
Gross losses from sales................... -- 5 129
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
(4) Loans (In Thousands)
A summary of loans follows:
December 31,
----------------------------
1997 1996
---------- -----------
Mortgage loans:
One-to-four family ....................... $ 68,907 $ 57,725
Multi-family.............................. 219,909 200,368
Commercial real estate.................... 149,540 139,430
Construction and development.............. 13,382 7,261
Home equity............................... 5,276 6,398
Second.................................... 15,855 19,872
---------- -----------
Total mortgage loans.................. 472,869 431,054
---------- -----------
Commercial loans:
Participations............................ 24,000 52,950
Other..................................... 9,074 9,221
---------- -----------
Total commercial loans................ 33,074 62,171
---------- -----------
Consumer loans.............................. 1,393 1,023
---------- -----------
Total gross loans..................... 507,336 494,248
Unadvanced funds on loans................... (9,352) (11,950)
Deferred loan origination fees.............. (1,562) (1,326)
Unearned discounts.......................... (10) (289)
---------- -----------
$ 496,412 $ 480,683
========== ===========
The Bank's portfolio, other than commercial loan participations, is
substantially concentrated within Massachusetts. Commercial 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.
Non-accrual loans amounted to $803 and $1,337 at December 31, 1997 and 1996,
respectively. If interest payments on all non-accrual loans for the years ended
December 31, 1997, 1996 and 1995 had been made in accordance with original loan
agreements, interest income of $80, $201 and $90 would have been recognized on
the loans compared to interest income actually recognized of $6, $39 and $38,
respectively.
Restructured loans amounted to $2,287 and $5,438 at December 31, 1997 and 1996,
respectively. 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. At December 31,
1997, there were no outstanding commitments to lend additional funds to
borrowers with restructured loans. If interest payments on all restructured
loans for the years ended December 31, 1997, 1996 and 1995 had been made in
accordance with original loan agreements, interest income of $271, $993 and $989
would have been recognized on the loans compared to interest income actually
recognized of $115, $1,080 and $653, respectively.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
The recorded investment in impaired loans, as defined by SFAS No. 114 at the
dates indicated, is as follows:
December 31,
---------------------
1997 1996
-------- ---------
Multi-family mortgage loans.............................. $ 134 $ 768
Commercial real estate mortgage loans.................... 2,032 5,097
Construction and development mortgage loans.............. -- 687
-------- ---------
$ 2,166 $ 6,552
======== =========
Average recorded investment in impaired loans for the
the years ended December 31, 1997 and 1996............. $ 4,359 $ 11,427
======== =========
Impaired loans for which an allowance for impairment was not required primarily
due to prior charge-offs and/or the sufficiency of collateral values amounted to
$2,166 and $1,527 at December 31, 1997 and 1996, respectively. The remaining
impaired loans of $0 and $5,025 at those dates had an allowance for impairment
of $0 and $1,009 respectively, all of which was included in the overall
allowance for loan losses.
Interest income recognized on impaired loans, all of which was recorded on a
cash basis, was $183, $844 and $1,099 for the years ended December 31, 1997,
1996 and 1995, respectively.
A portion of certain commercial real estate loans originated and serviced by the
Bank are sold periodically to other banks on a non-recourse basis. The balance
of loans acquired by other banks amounted to $13,610 and $17,277 at December 31,
1997 and 1996, respectively. No fees are collected by the Bank for servicing
such loan participations.
In the ordinary course of business, the Bank makes loans to its Trustees 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,
-----------------------
1997 1996
------- -------
Balance at beginning of year........................ $ 571 $ 827
Repayments.......................................... 11 256
------ -------
Balance at end of year.............................. $ 560 $ 571
====== =======
(5) Allowance for Loan Losses (In Thousands)
An analysis of the allowance for loan losses for the years indicated follows:
Year ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
Balance at beginning of year............. $ 12,326 $ 12,326 $ 12,274
Provision for loan losses................ -- -- --
Charge-offs.............................. (6) (166) (240)
Recoveries............................... 143 166 292
--------- --------- ---------
Balance at end of year................... $ 12,463 $ 12,326 $ 12,326
========= ========= =========
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
(6) Bank Premises and Equipment (In Thousands)
Bank premises and equipment consist of the following:
December 31,
---------------------
1997 1996
-------- ---------
Land................................................... $ 62 $ 62
Office building and improvements....................... 1,917 1,815
Furniture, fixtures and equipment...................... 1,737 1,495
-------- --------
3,716 3,372
Accumulated depreciation and amortization.............. 2,355 1,930
-------- --------
$ 1,361 $ 1,442
======== ========
(7) Other Real Estate Owned (In Thousands)
The composition of other real estate owned as of the dates indicated is as
follows:
December 31,
------------------------
1997 1996
-------- ---------
Commercial real estate............................... $ 1,902 $ 1,840
Residential.......................................... 657 70
-------- ---------
2,559 1,910
Valuation allowance.................................. 186 221
-------- ---------
$ 2,373 $ 1,689
======= =========
An analysis of the valuation allowance for the years indicated follows:
Year ended December 31,
-------------------------------
1997 1996 1995
------- ------- -------
Balance at beginning of year................ $ 221 $ 319 $ 403
Provision for losses........................ -- -- --
Write-downs................................. (35) (98) (84)
------- ------- ------
Balance at end of year...................... $ 186 $ 221 $ 319
======= ======= ======
Net other real estate owned income (expense) for the years indicated is
comprised of the following:
Year ended December 31,
-------------------------------
1997 1996 1995
------- ------- ------
Rental income................................ $ 361 $ 272 $ 168
Provision for losses......................... -- -- --
Operating and foreclosure expenses........... (135) (122) (208)
Gains from sales............................. 12 149 --
------- ------- ------
$ 238 $ 299 $ (40)
======= ======= ======
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
(8) Deposits (Dollars In Thousands)
A summary of deposits follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------- ----------------------
Weighted Weighted
average average
Amount rate Amount rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Demand checking accounts.................................. $ 10,582 0.00% $ 9,988 0.00%
NOW accounts.............................................. 40,211 1.75 38,560 1.75
Savings accounts.......................................... 14,090 2.50 15,578 2.50
Money market savings accounts............................. 161,335 3.88 158,110 3.85
--------- ---------
Total transaction deposit accounts................... 226,218 3.23 222,236 3.22
--------- ---------
Certificate of deposit accounts maturing:
Within six months...................................... 136,788 5.44 121,116 5.30
After six months but within 1 year..................... 65,771 5.52 74,709 5.55
After 1 year but within 2 years........................ 26,336 5.97 36,917 5.85
After 2 years but within 3 years....................... 16,600 6.68 13,135 6.18
After 3 years.......................................... 10,591 6.13 15,903 6.76
--------- ---------
Total certificate of deposit accounts................ 256,086 5.62 261,780 5.58
--------- ---------
$ 482,304 4.50% $ 484,016 4.50%
========= =========
</TABLE>
Certificate of deposit accounts issued in amounts of $100 or more totaled
$42,423 and $38,251 at December 31, 1997 and 1996, respectively.
Interest expense on deposit balances is summarized as follows:
Year ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
NOW accounts................................ $ 645 $ 641 $ 620
Savings accounts............................ 377 426 498
Money market savings accounts............... 6,109 5,957 5,665
Certificate of deposit accounts............. 14,569 14,751 14,127
--------- --------- ---------
$ 21,700 $ 21,775 $ 20,910
========= ========= =========
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
(9) Borrowed Funds (Dollars In Thousands)
Borrowed funds are comprised of the following advances from the FHLB:
December 31, 1997 December 31, 1996
--------------------- --------------------
Weighted Weighted
average average
Amount rate Amount rate
------ ---- ------ ----
Within 1 year................ $ 20,665 5.98% $ 15,100 6.97%
Over 1 year to 2 years....... 11,550 6.79 20,665 5.98
Over 2 years to 3 years...... 9,400 6.24 10,550 6.83
Over 3 years to 4 years...... 9,350 6.66 4,900 6.13
Over 4 years to 5 years...... 15,300 6.32 9,350 6.65
Over 5 years ............... 3,000 6.39 -- --
--------- ---------
$ 69,265 6.33% $ 60,565 6.49%
========= =========
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.
(10) Income Taxes (Dollars in Thousands)
Provision for income taxes are comprised of the following amounts:
Year ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
Current:
Federal.......................... $ 7,474 $ 5,957 $ 5,855
State............................ 155 1,773 1,826
--------- --------- ---------
7,629 7,730 7,681
--------- --------- ---------
Deferred:
Federal.......................... (384) (31) (238)
State............................ 82 52 (34)
--------- --------- ---------
(302) 21 (272)
---------- --------- ---------
$ 7,327 $ 7,751 $ 7,409
========= ========= =========
The reduction in state income tax expense for the year ended December 31, 1997
is attributable primarily to the establishment of a real estate investment
trust.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
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:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Expected income tax expense at
statutory federal tax rate....................... $ 7,322 $ 6,891 $ 6,583
State taxes, net of federal income tax benefit..... 155 1,204 1,183
Dividend income received deduction................. (173) (167) (163)
Change in federal tax rate applied to deferred
income taxes..................................... -- (123) --
Utilization of capital loss carryforward........... -- -- (124)
Other, net......................................... 23 (54) (70)
-------- -------- --------
$ 7,327 $ 7,751 $ 7,409
======== ======== ========
Effective income tax rates......................... 34.8% 39.4% 38.7%
==== ==== ====
</TABLE>
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,
--------------------
1997 1996
------- --------
Deferred tax assets:
Allowance for loan losses........................... $ 5,187 $ 5,253
Pension and postretirement benefits................. 1,296 1,026
Loan origination fees............................... -- 80
Other............................................... 164 8
------- --------
Total gross deferred tax assets................... 6,647 6,367
------- --------
Deferred tax liabilities:
Unrealized gain on available for sale securities.... 8,301 5,032
Post-1987 bad debt reserves......................... 153 256
Savings Bank Life Insurance Company stock........... 108 108
Other............................................... 126 96
------- --------
Total gross deferred tax liabilities.............. 8,688 5,492
------- --------
Net deferred tax asset (liability)................ $(2,041) $ 875
======= ========
For income tax purposes, in 1997, the Bank changed its fiscal year end date from
October 31 to December 31. Historically, the Bank 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 Bank) and required recapture into taxable income over a
six year period all bad debt reserves accumulated after October 31, 1988. The
Bank had previously recorded a deferred tax liability with respect to these
post-1987 reserves and, therefore, this new requirement had no effect on the
Bank's income tax expense or net income.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
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 after Conversion (see note 15), 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.
(11) Employee Benefits (Dollars In Thousands)
Pension Plan
The Bank sponsors a non-contributory defined benefit pension plan that covers
all employees who meet specific age and length of service requirements, which is
administered by the Savings Banks Employees Retirement Association ("SBERA").
The plan provides for benefits to be paid to eligible employees at retirement
based primarily upon their years of service with the Bank and the average of
their three highest consecutive years of compensation. The Bank's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide not only for benefits
attained to date, but also for those expected to be earned in the future. The
plan assets are invested primarily in U.S. Government obligations, corporate
bonds and equity securities.
The following table sets forth the funded status of the plan for the years ended
October 31, the plan's latest valuation dates, as determined by the plan's
actuary:
1997 1996
------- -------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $3,056 and $2,997.......................... $ 3,084 $ 3,060
======= =======
Projected service obligation for service rendered to date... $ 4,706 $ 4,338
Plan assets at fair value................................... 5,523 4,833
------- -------
Plan assets greater than projected benefit obligation.. 817 495
Unamortized transition assets............................... (58) (61)
Unrecognized net gain....................................... (2,055) (1,615)
------- -------
Accrued pension expense................................ $(1,296) $(1,181)
======= =======
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
Net pension expense for the years ended October 31 follows:
1997 1996 1995
------- ------- ------
Service cost-benefits earned during the year...... $ 247 $ 276 $ 207
Interest cost on projected benefit obligation..... 325 328 325
Actual return on plan assets...................... (730) (618) (695)
Amortization of net losses........................ 273 279 385
------- ------- -------
Net pension expense.......................... $ 115 $ 265 $ 222
======= ======= =======
Net pension expense for the years ended December 31, 1997, 1996 and 1995
amounted to $82, $264 and $327, respectively.
Assumptions used in determining the actuarial present value of projected benefit
obligations and pension expense follow:
1997 1996 1995
------- ------- ------
Discount rate.................................... 7.25% 7.00% 8.00%
Rate of increase in compensation................. 6.00 6.00 7.00
Expected long-term rate of return on assets...... 8.00 8.00 7.00
Supplemental Executive Retirement Agreements
The Bank maintains agreements that provide supplemental retirement benefits to
certain executive officers. Total expenses for benefits payable under the
agreements amounted to $503, $311 and $284 for the years ended December 31,
1997, 1996 and 1995, respectively. Aggregate benefits payable included in
accrued expenses and other liabilities at December 31, 1997 and 1996 amounted to
$1,548 and $1,045, respectively.
401(K) Plan
The Bank 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 Bank makes no contribution to the Plan.
Other Postretirement Benefits
The Bank provides for part of the annual expense of health insurance for certain
retired employees and their dependents. The Bank accrues the cost of these
benefits over the years employees provide service to the date of their
eligibility for such benefits. The transition obligation for future benefits is
being amortized over a twenty year period.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
The following is a reconciliation of the postretirement benefit obligations and
the amount of accrued postretirement benefit cost included in the consolidated
balance sheet as of October 31, the latest valuation date.
1997 1996
----- -----
Actuarial present value of postretirement benefit obligations:
Retirees .................................................. $ 106 $ 111
Fully eligible employees .................................. 58 54
Other active employees .................................... 245 201
----- -----
Accumulated postretirement benefit obligation (unfunded) 409 366
Unamortized net transition obligation ..................... (313) (317)
Unrecognized net gain ..................................... 74 76
----- -----
Total accrued postretirement benefit cost .............. $ 170 $ 125
===== =====
The components of postretirement benefit expense for the years ended December 31
were as follows:
1997 1996 1995
---- ---- ----
Service cost-benefits earned during the year ........ $ 29 $ 24 $ 23
Interest cost on accumulated postretirement
benefit obligation ................................ 26 26 27
Amortization of transition obligation ............... 13 18 18
---- ---- ----
Net postretirement benefit expense ............. $ 68 $ 68 $ 68
==== ==== ====
The discount rate used to determine the accumulated postretirement benefit
obligations was 7.50% in 1997, 1996 and 1995. The assumed health care trend rate
used to measure the accumulated postretirement benefit obligation at December
31, 1997 was 7.0% initially, decreasing gradually to 5.0% in 2001 and
thereafter. A 1% point increase in the assumed health care cost trend rate would
have had an immaterial impact on 1997 postretirement benefit expense and the
accumulated postretirement benefit obligation at December 31, 1997.
(12) Commitments and Contingencies (In Thousands)
Off-Balance Sheet Financial Instruments
The Bank 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 Bank has in particular classes
of these instruments. The Bank'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 Bank uses the same policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
Financial instruments with off-balance sheet risk at the dates indicated
follows:
December 31,
---------------------
1997 1996
--------- -------
Financial instruments whose contract amounts
represent credit risk:
Commitments to originate loans:
Residential mortgage............................ $ 5,569 $ 4,506
Multi-family mortgage........................... 10,448 4,954
Commercial real estate mortgage................. 8,705 7,315
Construction and development mortgage........... 3,796 1,400
Commercial...................................... 3,215 2,280
Unadvanced portion of loans........................ 9,352 11,950
Unused lines of credit:
Equity.......................................... 8,803 8,272
Other........................................... 1,365 1,455
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 Bank 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.
Lease Commitments
The Bank 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,
------------
1998.................................................... $ 295
1999.................................................... 295
2000.................................................... 295
2001.................................................... 275
2002.................................................... 176
The leases contain escalation clauses for real estate taxes and other
expenditures. Total rental expense was $305, $258 and $232 for the years ended
December 31, 1997, 1996 and 1995, respectively.
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 Bank will
not be affected materially by the outcome of such proceedings.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
(13) Regulatory Capital Requirements
The Bank is subject to a capital based supervisory system that applies to all
insured depository institutions. The category into which the Bank's capital
ratios fall determines the degree of regulatory supervision to which the Bank
could be subjected. Capital categories consist of "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized. " An institution is deemed to be "well
capitalized" if (a) its risk based capital is 10% or greater, (b) its Tier 1
risk based capital ratio is 6% or greater and (c) its leverage ratio is 5% or
greater. At December 31, 1997, the Bank is "well capitalized."
When an insured institution's capital ratios fall below the "well capitalized"
level, it becomes subject to a series of increasingly restrictive supervisory
actions, to the point where a conservator or receiver must be designated for a
"critically undercapitalized" institution unless certain conditions are made by
the appropriate regulatory agencies. An institution is deemed to be "critically
undercapitalized" if its ratio of Tier I capital to total assets is 2% or less.
(14) Fair Value of Financial Instruments (In Thousands)
The following is a summary of the carrying values and estimated fair values of
the Bank's significant financial and non-financial instruments as of the dates
indicated:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
-------- --------- -------- ---------
Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks..................... $ 8,843 $ 8,843 $ 6,465 $ 6,465
Short-term investments...................... 11,670 11,670 19,870 19,870
Securities.................................. 186,802 186,958 162,473 162,548
Loans, net.................................. 483,949 486,192 468,357 466,666
Accrued interest receivable................. 5,240 5,240 5,106 5,106
Financial liabilities:
Demand, NOW, savings and money
market savings deposit accounts........... 226,218 226,218 222,236 222,236
Certificate of deposit accounts............. 256,086 255,226 261,780 262,023
Borrowed funds.............................. 69,265 68,848 60,565 60,583
</TABLE>
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.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
The following is a description of the principal valuation methods used by the
Bank 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 commercial participation loans,
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 commercial participation loans 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 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 Bank will charge
fees in exchange for its commitment. While these commitment fees have value, the
Bank has not estimated their value due to the short-term nature of the
underlying commitments and their immateriality.
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1997, 1996 and 1995
(15) Plan of Reorganization
On October 8, 1997, the Board of Trustees of the Bank adopted a Plan of
Reorganization ("the Plan") whereby the Bank will be reorganized from a state
chartered mutual savings bank into a mutual holding structure, subject to
approval by regulatory authorities and the Corporators of the Bank. As part of
the Plan, the Bank will establish a state chartered mutual holding company
("MHC") and a capital stock holding company incorporated in Massachusetts ("the
Company"). The Bank will become a state chartered capital stock bank wholly
owned by the Company. The Company plans to offer for sale 47% of the shares of
its common stock (the "Minority Ownership Interest") in a subscription offering
initially to Bank depositors, employee benefit plans of the Bank and other
certain eligible subscribers ("the Offering"). Any shares of common stock not
sold in the Offering are expected to be sold to underwriters for resale to the
public. After completion of the Offering, the MHC will be the 53% owner of the
Company.
As part of the Offering, the Bank will establish a liquidation account in an
amount equal to the Minority Ownership Interest multiplied by the retained
earnings of the Bank as of the date of the latest consolidated balance sheet
appearing in the final prospectus. The liquidation account will be maintained
for the benefit of eligible account holders and supplemental eligible account
holders who maintain their accounts at the Bank after the Offering. The
liquidation account will be reduced annually to the extent that such account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive balances for accounts then held.
Subsequent to the Offering, 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
applicable regulatory capital maintenance requirements or if such declaration,
payment or repurchase would otherwise violate regulatory requirements.
Offering costs are being deferred and will reduce the proceeds from the shares
sold in the Offering. If the Offering is not completed, all offering costs will
be expensed. As of December 31, 1997, Offering costs of $464 have been incurred
and are included in other assets.
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
