SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 0-23695
Brookline Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3402944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Washington Street, Brookline, MA 02147
(Address of principal executive offices) (Zip Code)
(617) 730-3500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES NO X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the latest practicable date.
Common Stock, $0.01 par value - 29,095,000 shares outstanding as of May 8,
1998.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
Index
-----
<TABLE>
<CAPTION>
Part I Financial Information Page
- ------ --------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
as of March 31, 1998 and December 31, 1997 1
Consolidated Statements of Income for the three
months ended March 31, 1998 and 1997 2
Consolidated Statements of Comprehensive Income for
the three months ended March 31, 1998 and 1997 3
Consolidated Statements of Changes in Stockholders'
Equity for the three months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II Other Information
- ------- -----------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
</TABLE>
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
Assets
Cash and due from banks............................................... $ 8,499 $ 8,843
Short-term investments................................................ 41,204 11,670
Securities available for sale......................................... 145,227 117,637
Securities held to maturity (market value of $78,357
and $65,600, respectively).......................................... 78,266 65,444
Restricted equity securities.......................................... 3,755 3,721
Loans................................................................. 542,496 496,412
Allowance for loan losses............................................. (12,464) (12,463)
---------- ----------
Net loans........................................................ 530,032 483,949
--------- ----------
Accrued interest receivable........................................... 6,199 5,240
Bank premises and equipment, net...................................... 1,299 1,361
Other real estate owned, net.......................................... 2,333 2,373
Other assets.......................................................... 388 881
--------- ----------
Total assets..................................................... $ 817,202 $ 701,119
========= ==========
Liabilities and Stockholders' Equity
Deposits.............................................................. $ 469,853 $ 482,304
Borrowed funds........................................................ 62,015 69,265
Mortgagors' escrow accounts........................................... 3,365 2,896
Income taxes payable.................................................. 2,144 5,901
Deferred income tax liability, net.................................... 2,974 2,041
Accrued expenses and other liabilities................................ 5,388 5,955
--------- ----------
Total liabilities................................................ 545,739 568,362
--------- ----------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
none issued....................................................... -- --
Common stock, $.01 par value; 45,000,000 shares authorized,
29,095,000 shares issued and outstanding.......................... 291 --
Additional paid-in capital.......................................... 134,406 --
Retained earnings, substantially restricted......................... 122,788 119,018
Accumulated other comprehensive income.............................. 15,372 13,739
Common stock acquired by the ESOP - 85,000 shares (1,394) --
--------- ----------
Total stockholders' equity....................................... 271,463 132,757
--------- ----------
Total liabilities and stockholders' equity....................... $ 817,202 $ 701,119
========= ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
1
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1998 1997
-------- ---------
(unaudited)
<S> <C> <C>
Interest income:
Loans................................................................ $ 11,117 $ 11,433
Debt securities...................................................... 2,540 2,025
Marketable equity securities......................................... 181 170
Restricted equity securities......................................... 56 51
Short-term investments............................................... 462 200
-------- --------
Total interest income............................................. 14,356 13,879
-------- --------
Interest expense:
Deposits............................................................. 5,638 5,347
Borrowed funds....................................................... 1,052 989
-------- --------
Total interest expense ........................................... 6,690 6,336
-------- --------
Net interest income.................................................... 7,666 7,543
Provision for loan losses.............................................. -- --
-------- --------
Net interest income after provision for loan losses............... 7,666 7,543
-------- --------
Non-interest income:
Fees and charges..................................................... 282 147
Gains on sales of securities, net.................................... 8 4
Other real estate owned income, net.................................. 49 53
Other income......................................................... 3 4
-------- --------
Total non-interest income......................................... 342 208
-------- --------
Non-interest expense:
Compensation and employee benefits................................... 1,294 1,288
Occupancy............................................................ 193 166
Equipment and data processing........................................ 283 293
Other................................................................ 355 411
-------- --------
Total non-interest expense........................................ 2,125 2,158
-------- --------
Income before income taxes............................................. 5,883 5,593
Provision for income taxes............................................. 2,113 2,000
-------- --------
Net income........................................................ $ 3,770 $ 3,593
======== ========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
2
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Net income............................................................. $ 3,770 $ 3,593
-------- --------
Other comprehensive income, net of taxes:
Unrealized holding gains arising during the period,
net of income tax expense (benefit) of $951 and $(18) ............ 1,638 20
Less reclassification adjustment for
gains included in net income, net of income tax
expense of $3 and $2........................................... (5) (2)
-------- --------
Total other comprehensive income............................. 1,633 18
-------- --------
Comprehensive income................................................... $ 5,403 $ 3,611
======== ========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
Three months ended March 31, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated Common
Additional other stock Total
Common paid-in Retained comprehensive acquired stockholders'
stock capital earnings income by ESOP equity
----- ------- -------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........ $ -- $ -- $ 105,287 $ 8,660 $ -- $ 113,947
Net income.......................... -- -- 3,593 -- -- 3,593
Unrealized gain on securities
available for sale, net of
reclassification adjustment....... -- -- -- 18 -- 18
------- --------- --------- -------- -------- ---------
Balance at March 31, 1997........... $ -- $ -- $ 108,880 $ 8,678 $ -- $ 117,558
======= ========= ========= ======== ========= =========
Balance at December 31, 1997........ $ -- $ -- $ 119,018 $ 13,739 $ -- $ 132,757
Net income.......................... -- -- 3,770 -- -- 3,770
Unrealized gain on securities
available for sale, net of
reclassification adjustment....... -- -- -- 1,633 -- 1,633
Net proceeds of stock offering
and issuance of common
stock (29,095,000 shares) 291 134,406 -- -- -- 134,697
Common stock acquired by
the ESOP (85,000 shares) -- -- -- -- (1,394) (1,394)
------- --------- --------- -------- --------- ----------
Balance at March 31, 1998........... $ 291 $ 134,406 $ 122,788 $ 15,372 $ (1,394) $ 271,463
======= ========= ========= ======== ========= ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1998 1997
-------- -------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 3,770 $ 3,593
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.................................... 113 111
Amortization, net of accretion, of securities premiums
and discounts.................................................. 179 106
Accretion of deferred loan origination fees
and unearned discounts......................................... (91) (404)
Net gains from sales of securities............................... (8) (4)
Net gains from sales of other real estate owned.................. (3) --
Deferred income taxes............................................ (24) (163)
(Increase) decrease in:
Accrued interest receivable.................................... (959) (115)
Other assets................................................... 493 (11)
Increase (decrease) in:
Income taxes payable........................................... (3,757) 1,408
Accrued expenses and other liabilities......................... (567) 186
-------- ---------
Net cash provided by (used in) operating activities.......... (854) 4,707
-------- ---------
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale....... 500 6
Proceeds from redemptions and maturities of securities
available for sale................................................. 11,735 6,108
Proceeds from redemptions and maturities of securities
held to maturity................................................... 3,586 13,093
Purchase of securities available for sale............................ (37,293) (8,960)
Purchase of securities held to maturity.............................. (16,521) (12,479)
Purchase of Federal Home Loan Bank of Boston stock................... (34) (13)
Net increase in loans................................................ (8,492) (11,280)
Purchase of bank premises and equipment............................... (43) (129)
Capital expenditures on other real estate owned...................... -- (10)
Proceeds from sales of other real estate owned....................... 35 35
-------- ---------
Net cash used for investing activities....................... (46,527) (13,629)
-------- ---------
(Continued)
</TABLE>
5
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - (Continued)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1998 1997
-------- -------
(unaudited)
<S> <C> <C>
Cash flows from financing activities:
Increase (decrease) in demand deposits and NOW, savings and
money market savings accounts...................................... $ (3,810) $ 1,197
Increase (decrease) in certificates of deposit....................... (8,641) 1,010
Proceeds from Federal Home Loan Bank of Boston advances.............. 750 6,000
Repayment of Federal Home Loan Bank of Boston advances............... (8,000) (1,750)
Increase in mortgagors' escrow accounts.............................. 469 249
Proceeds from issuance of common stock............................... 134,697 --
Purchase of shares of common stock by the ESOP....................... (1,394) --
--------- ---------
Net cash provided by financing activities...................... 114,071 6,706
--------- ---------
Net increase (decrease) in cash and cash equivalents................... 66,690 (2,216)
Cash and cash equivalents at beginning of period....................... 44,513 79,285
--------- ---------
Cash and cash equivalents at end of period............................. $ 112,203 $ 77,069
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds............................ $ 6,722 $ 6,318
Income taxes....................................................... 5,892 885
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 1998 and 1997
(Unaudited)
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and the instructions for Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation have been included. Results for the three months ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
(2) Reorganization and Stock Offering (Dollars in Thousands)
--------------------------------------------------------
Brookline Bancorp, Inc. (the "Company") is a Massachusetts corporation
that was organized in November 1997 at the direction of the Board of
Trustees of Brookline Savings Bank (the "Bank") for the purpose of
acquiring all of the capital stock of the Bank upon completion of the
Bank's reorganization from a mutual savings bank into a mutual holding
company structure. As part of the reorganization, the Company offered
for sale 47% of the shares of its common stock in an offering fully
subscribed for by eligible depositors of the Bank (the "Offering"). The
remaining 53% of the Company's shares of common stock were issued to
Brookline Bancorp, MHC (the "MHC"), a state-chartered mutual holding
company incorporated in Massachusetts. The reorganization and Offering
were completed on March 24, 1998. Prior to that date, the Company had no
assets or liabilities. The reorganization has been accounted for as an
"as if" pooling with assets and liabilities recorded at historical cost.
Completion of the Offering resulted in the issuance of 29,095,000 shares
of common stock, 15,420,350 shares (53%) of which were issued to the MHC
and 13,674,650 shares (47%) of which were sold to eligible depositors of
the Bank at $10.00 per share. Costs related to the Offering (primarily
marketing fees paid to an underwriting firm, professional fees,
registration fees, and printing and mailing costs) are estimated to have
aggregated $2,050 and have been deducted to arrive at net proceeds of
$134,697 from the Offering. This amount will be adjusted upon final
receipt of all invoices related to Offering costs. The Company
contributed 50% of the net proceeds of the Offering, or $67,348, to the
Bank for general corporate use. Net Offering proceeds retained by the
Company were used to fund a $1,394 loan to the Bank's employee stock
ownership plan and acquire short-term investments.
As part of the Offering, the Bank established a liquidation account
equal to $58,924 for the benefit of eligible account holders and
supplemental eligible account holders who maintain their deposit
accounts at the Bank after the Offering. The liquidation account is
reduced annually to the extent that such account holders have reduced
their qualifying deposits as of each anniversary date. Subsequent
increases in deposit account balances do not restore an account holder's
interest in the liquidation account. In the event of a complete
liquidation of the Bank, each eligible account holder and supplemental
eligible account holder would be entitled to receive balances for
qualifying deposits then held.
The Company and the Bank may not declare or pay dividends on and the
Company may not repurchase any of its shares of common stock if the
effect thereof would cause stockholders' equity to be reduced below the
required liquidation account balance or minimum regulatory capital
levels.
7
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
Three Months Ended March 31, 1998 and 1997
(Unaudited)
(3) Employee Stock Ownership Plan (Dollars in Thousands)
----------------------------------------------------
On March 19, 1998, the Bank established an employee stock ownership plan
(the "ESOP"). All employees meeting age and service requirements are
eligible to participate in the ESOP. The ESOP is authorized to purchase
up to 4% of the common stock sold in the Offering, or 546,986 shares, in
the open market and to borrow up to $7,500 from the Company to finance
the purchase of such shares. The loan is payable in quarterly
installments over 30 years and bears interest at 8.50% per annum.
The loan can be prepaid without penalty. Loan payments are to be funded
by cash contributions from the Bank and dividends on Company stock held
by the ESOP.
As of March 31, 1998, the ESOP borrowed $1,394 from the Company to
purchase 85,000 shares of common stock in the open market. No allocation
of shares to employees has been made nor have vesting conditions yet
been established. Accordingly, there was no ESOP expense for the three
months ended March 31, 1998.
(4) Earnings per Share
------------------
Earnings per share data is not presented as the Company completed its
Offering on March 24, 1998 and, accordingly, such data is not deemed
meaningful.
(5) Other Comprehensive Income (Dollars in Thousands)
-------------------------------------------------
The Company adopted Financial Accounting Standards Board Statement No.
130, "Reporting Comprehensive Income" (SFAS No. 130), effective January
1, 1998. SFAS No. 130 establishes standards for reporting comprehensive
income and its components (revenues, expenses, gains and losses).
Components of comprehensive income are net income and all other
non-owner changes in equity. The Statement requires that an enterprise
(a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company has chosen to
disclose comprehensive income in a separate financial statement, in
which the components of comprehensive income are displayed net of income
taxes.
Accumulated other comprehensive income is comprised entirely of
unrealized gains on securities available for sale, net of income taxes.
At March 31, 1998 and December 31, 1997, such taxes amounted to $9,258
and $8,301, respectively.
(6) Operating Segments
------------------
The Company adopted Financial Accounting Standards Board Statement No.
131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS No. 131), effective January 1, 1998. This Statement
establishes standards for reporting information about segments in annual
and interim financial statements. SFAS No. 131 introduces a new model
for segment reporting called the "management approach". The management
approach is based on the way the chief operating decision-maker
organizes segments within the company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure and any other
in which management disaggregates a company. Based on the "management
approach" model, the Company has determined that
8
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
Three Months Ended March 31, 1998 and 1997
(Unaudited)
its business is comprised of a single operating segment and that SFAS
No. 131 therefore has no impact on its financial statements.
(7) Commitments
-----------
At March 31, 1998, the Company had outstanding commitments to originate
loans of $48.0 million, $39.5 million of which were commercial real
estate and multi-family mortgage loans. Unused lines of credit available
to customers were $9.9 million, $8.6 million of which were equity lines
of credit.
9
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
Brookline Bancorp, Inc. (the "Company") was organized in November 1997 for
the purpose of acquiring all of the capital stock of Brookline Savings Bank (the
"Bank") upon completion of the Bank's reorganization from a mutual savings bank
into a mutual holding company structure. As part of the reorganization, the
Company offered for sale 47% of the shares of its common stock in an offering
fully subscribed for by eligible depositors of the Bank (the "Offering"). The
remaining 53% of the Company's shares of common stock were issued to Brookline
Bancorp, MHC, a state-chartered mutual holding company incorporated in
Massachusetts. The reorganization and Offering were completed on March 24, 1998.
See note 2 to the unaudited consolidated financial statements for further
information about the reorganization and the Offering.
Prior to March 24, 1998, the Company had no assets or liabilities. Its
principal activities since that date through March 31, 1998 have been to
complete the Offering, acquire all of the capital stock of the Bank, contribute
50% of the net proceeds of the Offering to the Bank and use the remaining 50% of
the net proceeds to acquire short-term investments and fund a $1.4 million loan
to the Bank's employee stock ownership plan.
The reorganization has been accounted for as an "as if" pooling with assets
and liabilities recorded at historical cost. The unaudited consolidated
financial statements as of and for the three months ended March 31, 1998 and
1997 include the accounts of the Company, the Bank and the Bank's subsidiaries.
This quarterly report on Form 10-Q contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those contemplated by such forward-looking statements.
These important factors include, without limitation, the Bank's continued
ability to originate quality loans, fluctuation of interest rates, real estate
market conditions in the Bank's lending areas, general and local economic
conditions, the Bank's continued ability to attract and retain deposits, the
Company's ability to control costs, new accounting pronouncements and changing
regulatory requirements.
Comparison of Financial Condition at March 31, 1998 and December 31, 1997
Total assets increased by $116.1 million, or 16.6%, from $701.1 million at
December 31, 1997 to $817.2 million at March 31, 1998. The increase was
attributable to the completion of the Company's Offering on March 24, 1998. Net
proceeds from the Offering amounted to $134.7 million. Certain subscribers to
the Offering paid for their shares by authorizing withdrawals from deposit
account balances maintained at the Bank. This was the primary reason for the
$12.4 million decline in deposits from $482.3 million at December 31, 1997 to
$469.9 million at March 31, 1998.
The net proceeds of the Offering were used primarily to acquire short-term
investments (including commercial loan participations), debt obligations
maturing in three years or less, and 85,000 shares of the Company's common stock
for the Bank's employee stock ownership plan at an aggregate cost of $1.4
million. 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. Commercial loan participations
amounted to $61.5 million at March 31, 1998 and $24.0 million at December 31,
1997.
Excluding commercial loan participations, the loan portfolio increased by
$8.6 million, or 1.9%, from $459.9 million at December 31, 1997 to $468.5
million at March 31, 1998. The net increase resulted primarily from changes
10
<PAGE>
in the commercial real estate, multi-family and construction mortgage loan
portfolios. Commercial real estate mortgage loans increased by $13.3 million to
$162.8 million, multi-family mortgage loans decreased by $4.1 million to $215.8
million and construction mortgage loans increased by $2.3 million to $14.9
million during the three month period.
Stockholders' equity increased from $132.8 million, or 18.9% of total
assets, at December 31, 1997 to $271.5 million, or 33.2% of total assets, at
March 31, 1998. The increase resulted from receipt of the net proceeds from the
Offering, net income earned and changes in other comprehensive income during the
three months ended March 31, 1998.
Non-Performing Assets, Restructured Loans and Allowance for Loan Losses
The following table sets forth information regarding non-performing assets,
restructured loans and the allowance for loan losses:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans:
Mortgage loans:
One-to-four family $ 96 $ 230
Commercial 300 522
Home equity 52 51
--------- ---------
Total non-accrual loans 448 803
Other real estate owned, net of allowance
for losses of $186 and $186, respectively 2,333 2,373
--------- ---------
Total non-performing assets $ 2,781 $ 3,176
========= =========
Restructured loans $ 2,287 $ 2,287
========= =========
Allowance for loan losses $ 12,464 $ 12,463
========= =========
Allowance for loan losses as a percent
of total loans 2.30% 2.51%
Allowance for loan losses as a percent
of total loans, excluding commercial
participation loans 2.59 2.64
Non-accrual loans as a percent of total loans 0.08 0.16
Non-performing assets as a percent of
total assets 0.34 0.45
</TABLE>
During the three months ended March 31, 1998, there were no loan
charge-offs and $1,000 in recoveries of loans previously charged off.
While management believes that, based on information currently available,
the allowance for loan losses is sufficient to cover losses inherent in the
Bank's loan portfolio at this time, no assurances can be given that the level of
the allowance will be sufficient to cover future loan losses or that future
adjustments to the allowance will not be
11
<PAGE>
necessary if economic and/or other conditions differ substantially from the
economic and other conditions considered by management in evaluating the
adequacy of the current level of the allowance.
Comparison of Operating Results for the Three Months Ended March 31, 1998 and
1997
General
Operating results are primarily dependent on the Bank's net interest
income, which is the difference between the interest earned on the Bank's loan
and investment securities portfolio and the interest paid on deposits and
borrowings. Operating results are also affected by provisions for loan losses,
the level of income from non-interest sources such as fees and sales of
investment securities or other assets, operating expenses and income taxes.
Operating results are also significantly affected by general economic and
competitive conditions, particularly changes in interest rates, as well as
government policies and actions of regulatory authorities.
Net income for the three months ended March 31, 1998 was $3.8 million
compared to $3.6 million for the three months ended March 31, 1997, an increase
of 4.9%. The 1997 period included $908,000 of interest income collected from a
borrower whose loans were on non-accrual and which related to interest earned in
periods prior to 1997. Excluding this revenue, the increase in net income in the
1998 first quarter compared to the 1997 first quarter would have been $700,000,
or 22.8%. This level of increase resulted primarily from the investment of the
stock subscriptions and net proceeds of the Offering during and subsequent to
the stock subscription period.
Interest Income
Excluding the effect of the $908,000 of interest income referred to in the
preceding paragraph, interest income on loans increased from $10.5 million for
the three months ended March 31, 1997 to $11.1 million for the three months
ended March 31, 1998, or 5.6%. This rate of increase was less than the 9.3% rate
of growth in average loans outstanding (exclusive of commercial participation
loans) and resulted from a decline in the average yields on such loans from
9.00% in the 1997 period to 8.87% in the 1998 period.
The reduction in loan yield is a reflection of the declining interest rate
environment of the past year. That environment has prompted some multi-family
and commercial real estate borrowers to exercise their options to convert their
loans to a fixed-rate basis for several years. Additionally, many new
adjustable-rate loans are being priced at inception on a two to seven year
fixed-rate basis. If interest rates increase during the fixed rate phase of
these loans, net interest income could be negatively affected. If current market
conditions continue, management believes that the Bank's interest rate spread
(the difference between yields earned on assets and rates paid on deposits and
borrowed funds) will decline. The Bank's Asset/Liability Committee, comprised of
senior management, is monitoring this situation.
Interest income from investment securities and short-term investments
increased from $2.4 million for the three months ended March 31, 1997 to $3.2
million for the three months ended March 31, 1998. The increase resulted
primarily from investment of the stock subscriptions and net proceeds of the
Offering.
Interest Expense
Interest expense increased 5.6% from $6.3 million to $6.7 million for the
three month periods ended March 31, 1997 and 1998, respectively. Most of the
increase resulted from payment of interest on stock subscriptions from the
Offering between the date of receipt of such proceeds and the completion date of
the Offering. The annual rate paid on funds received not credited directly to
existing deposit accounts was 2.50%.
12
<PAGE>
Non-Interest Income
Non-interest income was $342,000 for the three months ended March 31, 1998
compared to $208,000 for the three months ended March 31, 1997 primarily as a
result of a $108,000 increase in loan prepayment fees.
Non-Interest Expense
Non-interest expense declined by $33,000, or 1.5%, from $2.2 million for
the three months ended March 31, 1997 to $2.1 million for the three months ended
March 31, 1998. Compensation and employee benefits were about the same in both
periods as higher costs resulting from salary increases and additional personnel
were offset by lower supplemental executive retirement costs. The increase in
occupancy expense resulted primarily from branch lease renewals. The decline in
other expenses resulted primarily from lower professional fees. In the first
quarter of 1997, professional fees were higher as a result of the formation of a
real estate investment trust subsidiary.
Income Taxes
The effective rate of income tax expense was 35.9% for the three months
ended March 31, 1998 compared to 35.8% for the three months ended March 31,
1997. Creation of the real estate investment trust subsidiary in 1997 and
continued utilization of a securities investment subsidiary enabled the Company
to achieve a low rate of state income tax expense.
Asset/Liability Management
The Bank's Asset/Liability Committee is responsible for managing interest
rate risk and reviewing with the Board of Directors on a quarterly basis its
activities and strategies, the effect of those strategies on the Bank's
operating results, the Bank's interest rate risk position and the effect changes
in interest rates would have on the Bank's net interest income.
Generally, it is the Bank's policy to reasonably match the rate sensitivity
of its assets and liabilities. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. At March 31,
1998, interest-earning assets maturing or repricing within one year amounted to
$420.7 million and interest-bearing liabilities maturing or repricing within one
year amounted to $416.2 million resulting in a cumulative one-year positive gap
position of $4.5 million, or 0.5% of total assets.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, principal and interest
payments on loans and debt securities and borrowings from the Federal Home Loan
Bank of Boston (the "FHLB"). In March 1998, $134.7 million of net proceeds from
the Offering added significantly to the funds available to the Company for use
in conducting its business. While maturities and scheduled amortization of loans
and investments are predictable sources of funds, deposit flows and mortgage
loan prepayments are greatly influenced by interest rate trends, economic
conditions and competition.
During the past few years, the combination of generally low interest rates
on deposit products and the attraction of alternative investments such as mutual
funds and annuities has resulted in little growth or a net decline in deposits
in certain time periods. Based on its monitoring of historic deposit trends and
its current pricing strategy for deposits, management believes the Bank will
retain a large portion of its existing deposit base.
From time to time, the Bank utilizes advances from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. During the three months ended March 31, 1998, the Bank repaid
13
<PAGE>
advances of $8.0 million and obtained new advances of $750,000. Total advances
outstanding at March 31, 1998 amounted to $62.0 million.
The Bank's most liquid assets are cash and due from banks, short-term
investments, debt securities and commercial loan participations that generally
mature within 90 days. At March 31, 1998, such assets amounted to $124.7
million, or 15.3% of total assets.
At March 31, 1998, the Company and the Bank exceeded all regulatory capital
requirements. The Bank's leverage capital was $256.1 million, or 34.8% of
adjusted assets. The minimum required leverage capital ratio is 3.00% to 5.00%
depending on a bank's supervisory rating.
Year 2000 ("Y2K") Compliance
The Company is addressing the Y2K issue as it affects all of its software,
hardware and other systems to insure the Company is Y2K compliant. The Y2K issue
could impact any computer or other date sensitive systems that store dates using
a two digit year format. These systems may recognize the year "00" as 1900, not
2000. This could produce miscalculations, generate erroneous data or even cause
a system to fail.
The Company has identified and categorized all software, hardware and other
systems as to their business significance and critical nature. All material data
processing of the Company that could be affected by the Y2K issue is provided by
third parties. The Company has contacted such third parties and received
responses from them regarding their plans to become Y2K compliant. Management is
monitoring the compliance efforts of such third parties and expects to conduct
tests of critical software, hardware and other systems for Y2K compliance during
1998 and 1999.
Since the Company outsources all of its major data processing systems, it
is vulnerable to the failure of those third parties to remediate their own Y2K
issue. There can be no assurance that third party systems on which the Company's
systems rely will be timely remediated.
The Company expects to incur some costs through 1998 and 1999 to become Y2K
compliant. It does not expect such costs to be material to the operating
expenses of the Company. Most of the costs are not expected to be incremental to
the Company, but rather represent new equipment and software that would
otherwise be purchased in the normal course of the Company's business. The
Company presently believes the Y2K issue will not pose significant operating
problems for the Company. However, if implementation and testing plans are not
completed in a satisfactory and timely manner, in particular by third parties on
which the Company is dependent, or other unforeseen problems arise, the Y2K
issue could have a material adverse effect on the operations of the Company.
Part II - Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are not involved in any litigation, nor is
the Company aware of any pending litigation, other than legal proceedings
incident to the business of the Company. Management believes the results of any
current litigation would be immaterial to the consolidated financial condition
or results of operations of the Company.
14
<PAGE>
Item 2. Changes in Securities
The Company was organized in November 1997 at the direction of the Board of
Trustees of the Bank for the purpose of acquiring all of the capital stock of
the Bank upon completion of the Bank's reorganization from a mutual savings bank
into a mutual holding company structure. As part of the reorganization, the
Company offered for sale 47% of the shares of its common stock in an offering
fully subscribed for by eligible depositors of the Bank (the "Offering"). The
remaining 53% of the Company's shares of common stock were issued to Brookline
Bancorp, MHC (the "MHC"), a state-chartered mutual holding company incorporated
in Massachusetts. The reorganization and Offering were completed on March 24,
1998.
Completion of the Offering resulted in the issuance of 29,095,000 shares of
common stock, 15,420,350 shares (53%) of which were issued to the MHC and
13,674,650 shares (47%) of which were sold to eligible depositors of the Bank at
$10.00 per share. Costs related to the Offering (primarily marketing fees paid
to an underwriting firm, professional fees, registration fees, and printing and
mailing costs) are estimated to have aggregated $2.1 million and have been
deducted to arrive at net proceeds of $134.7 million from the Offering. This
amount will be adjusted upon final receipt of all invoices related to Offering
costs. The Company contributed 50% of the net proceeds of the Offering, or $67.3
million, to the Bank for general corporate use. Net Offering proceeds retained
by the Company were used to acquire short-term investments and fund a $1.4
million loan to the Bank's employee stock ownership plan.
Item 3. Default Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
All required exhibits are included in Part I under Financial Statements
(Unaudited) and Management's Discussion and Analysis of Operations, and are
incorporated by reference, herein.
There were no reports filed on Form 8-K.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
BROOKLINE BANCORP, INC.
Date: May 8, 1998 By: /s/ Richard P. Chapman, Jr.
------------------------------------------
Richard P. Chapman, Jr.
President and Chief Executive Officer
Date: May 8, 1998 By: /s/ Paul R. Bechet
------------------------------------------
Paul R. Bechet
Senior Vice President and Chief Financial Officer
16
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