================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 0-23695
Brookline Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3402944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Washington Street, Brookline, MA 02447-0469
(Address of principal executive offices) (Zip Code)
(617) 730-3500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the latest practicable date.
Common Stock, $0.01 par value - 29,095,000 shares outstanding as of July
29, 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 June 30, 1998 and December 31, 1997 1
Consolidated Statements of Income for the three
months and six months ended June 30, 1998 and 1997 2
Consolidated Statements of Comprehensive Income for
the three months and six months ended June 30, 1998 and 1997 3
Consolidated Statements of Changes in Stockholders'
Equity for the six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 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 16
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature Page 18
</TABLE>
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- ------------
(unaudited)
Assets
------
<S> <C> <C>
Cash and due from banks............................................... $ 6,261 $ 8,843
Short-term investments................................................ 54,890 11,670
Securities available for sale......................................... 148,827 117,637
Securities held to maturity (market value of $94,444
and $65,600, respectively).......................................... 94,324 65,444
Restricted equity securities.......................................... 4,279 3,721
Loans................................................................. 529,341 496,412
Allowance for loan losses............................................. (12,566) (12,463)
--------- ----------
Net loans........................................................ 516,775 483,949
--------- ----------
Accrued interest receivable........................................... 5,986 5,240
Bank premises and equipment, net...................................... 1,225 1,361
Other real estate owned, net.......................................... 2,305 2,373
Other assets.......................................................... 457 881
--------- ----------
Total assets..................................................... $ 835,329 $ 701,119
========= ==========
Liabilities and Stockholders' Equity
------------------------------------
Deposits.............................................................. $ 467,465 $ 482,304
Borrowed funds........................................................ 78,415 69,265
Mortgagors' escrow accounts........................................... 3,034 2,896
Income taxes payable.................................................. 2,726 5,901
Deferred income tax liability, net.................................... 2,435 2,041
Accrued expenses and other liabilities................................ 5,716 5,955
--------- ----------
Total liabilities................................................ 559,791 568,362
--------- ----------
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.......................................... 134,531 --
Retained earnings, substantially restricted......................... 127,931 119,018
Accumulated other comprehensive income.............................. 14,661 13,739
Unallocated common stock held by ESOP - 115,975 shares
and none, respectively............................................ (1,876) --
--------- ----------
Total stockholders' equity....................................... 275,538 132,757
--------- ----------
Total liabilities and stockholders' equity....................... $ 835,329 $ 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 Six months ended
June 30, June 30,
------------------------ ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans, excluding money market participation loans........ $ 10,582 $ 9,971 $ 21,112 $ 20,648
Money market participation loans......................... 738 739 1,325 1,495
Debt securities.......................................... 3,020 2,208 5,560 4,233
Marketable equity securities............................. 171 181 352 351
Restricted equity securities............................. 59 52 115 103
Short-term investments................................... 649 118 1,111 318
--------- --------- --------- ---------
Total interest income................................. 15,219 13,269 29,575 27,148
--------- --------- --------- ---------
Interest expense:
Deposits................................................. 5,136 5,423 10,774 10,770
Borrowed funds........................................... 1,138 1,051 2,190 2,040
--------- --------- --------- ---------
Total interest expense ............................... 6,274 6,474 12,964 12,810
--------- --------- --------- ---------
Net interest income........................................ 8,945 6,795 16,611 14,338
Provision for loan losses.................................. 100 -- 100 --
--------- --------- --------- ---------
Net interest income after provision for loan losses... 8,845 6,795 16,511 14,338
--------- --------- --------- ---------
Non-interest income:
Fees and charges......................................... 305 241 587 388
Gains on sales of securities, net........................ 1,238 70 1,246 74
Other real estate owned income, net...................... 52 67 101 120
Other income............................................. 5 65 8 69
--------- --------- --------- ---------
Total non-interest income............................. 1,600 443 1,942 651
--------- --------- --------- ---------
Non-interest expense:
Compensation and employee benefits....................... 1,447 1,282 2,741 2,570
Occupancy................................................ 165 176 358 342
Equipment and data processing............................ 313 293 596 586
Other.................................................... 406 364 761 775
--------- --------- --------- ---------
Total non-interest expense............................ 2,331 2,115 4,456 4,273
--------- --------- --------- ---------
Income before income taxes................................. 8,114 5,123 13,997 10,716
Provision for income taxes................................. 2,971 1,752 5,084 3,752
--------- --------- --------- ---------
Net income............................................ $ 5,143 $ 3,371 $ 8,913 $ 6,964
========= ========= ========= =========
Weighted average common shares
outstanding during the period 29,004,114
==========
Earnings per common share $ 0.18
=======
</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 Six months ended
June 30, June 30,
------------------------ ----------------------
1998 1997 1998 1997
--------- --------- --------- --------
(unaudited)
<S> <C> <C> <C> <C>
Net income................................................. $ 5,143 $ 3,371 $ 8,913 $ 6,964
--------- --------- --------- ---------
Other comprehensive income, net of taxes:
Unrealized holding gains................................. 89 2,740 2,686 2,743
Income tax expense (benefit)............................. 32 1,053 991 1,036
--------- --------- --------- ---------
Net unrealized holding gains....................... 57 1,687 1,695 1,707
--------- --------- --------- ---------
Less reclassification adjustment for gains
included in net income:
Realized gains........................................ 1,238 70 1,246 74
Income tax expense.................................... 470 24 473 26
--------- --------- --------- ---------
Net reclassification adjustment.................... 768 46 773 48
--------- --------- --------- ---------
Total other comprehensive income................... (711) 1,641 922 1,659
--------- --------- --------- ---------
Comprehensive income....................................... $ 4,432 $ 5,012 $ 9,835 $ 8,623
========= ========= ========= =========
</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)
Six months ended June 30, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Unallocated
Accumulated common
Additional other stock Total
Common paid-in Retained comprehensive held 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........................... -- -- 6,964 -- -- 6,964
Unrealized gain on securities
available for sale, net of
reclassification adjustment....... -- -- -- 1,659 -- 1,659
------- -------- -------- ------- -------- --------
Balance at June 30, 1997............. $ -- $ -- $112,251 $10,319 $ -- $122,570
======= ======== ======== ======= ======== ========
Balance at December 31, 1997......... $ -- $ -- $119,018 $13,739 $ -- $132,757
Net income........................... -- -- 8,913 -- -- 8,913
Unrealized gain on securities
available for sale, net of
reclassification adjustment....... -- -- -- 922 -- 922
Net proceeds of stock offering
and issuance of common
stock (29,095,000 shares)......... 291 134,527 -- -- -- 134,818
Common stock acquired by
ESOP (122,500 shares)............. -- -- -- -- (1,981) (1,981)
Common stock held by ESOP
committed to be released
(6,525 shares) -- 4 -- -- 105 109
------- -------- -------- ------- -------- ---------
Balance at June 30, 1998............. $ 291 $134,531 $127,931 $14,661 $ (1,876) $ 275,538
======= ======== ======== ======= ========= =========
</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>
Six months ended
June 30,
------------------------
1998 1997
-------- -------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 8,913 $ 6,964
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses........................................ 100 --
Provision for losses on other real estate owned.................. -- --
Provision for ESOP............................................... 109 --
Depreciation and amortization.................................... 234 218
Amortization, net of accretion, of securities premiums
and discounts.................................................. 391 268
Accretion of deferred loan origination fees
and unearned discounts......................................... (231) (471)
Net gains from sales of securities available for sale............ (1,246) (74)
Net gains from sales of other real estate owned.................. (3) --
Deferred income taxes............................................ (125) (57)
(Increase) decrease in:
Accrued interest receivable.................................... (746) (141)
Other assets................................................... 424 154
Increase (decrease) in:
Income taxes payable........................................... (3,175) 2,324
Accrued expenses and other liabilities......................... (239) 243
-------- ---------
Net cash provided by operating activities.................... 4,406 9,428
-------- ---------
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale....... 2,449 110
Proceeds from redemptions and maturities of securities
available for sale................................................. 21,240 12,546
Proceeds from redemptions and maturities of securities
held to maturity................................................... 6,739 16,164
Purchase of securities available for sale............................ (52,320) (20,124)
Purchase of securities held to maturity.............................. (35,882) (21,872)
Purchase of Federal Home Loan Bank of Boston stock................... (558) (38)
Net increase in loans................................................ (23,809) (21,045)
Proceeds from sales of participation in loans........................ 1,739 1,198
Purchase of bank premises and equipment.............................. (82) (161)
Capital expenditures on other real estate owned...................... -- (37)
Proceeds from sales of other real estate owned....................... 55 32
-------- ---------
Net cash used for investing activities....................... (80,429) (33,227)
-------- ---------
(Continued)
</TABLE>
5
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - (Continued)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------
1998 1997
-------- -------
(unaudited)
<S> <C> <C>
Cash flows from financing activities:
Decrease in demand deposits and NOW, savings and
money market savings accounts...................................... $ (2,072) $ (970)
Increase (decrease) in certificates of deposit....................... (12,767) 377
Proceeds from Federal Home Loan Bank of Boston advances.............. 20,750 11,492
Repayment of Federal Home Loan Bank of Boston advances............... (11,600) (6,742)
Increase in mortgagors' escrow deposits.............................. 138 70
Net proceeds from issuance of common stock........................... 134,818 --
Purchase of common stock for ESOP.................................... (1,981) --
--------- ---------
Net cash provided by financing activities...................... 127,286 4,227
--------- ---------
Net increase (decrease) in cash and cash equivalents................... 51,263 (19,572)
Cash and cash equivalents at beginning of period....................... 44,513 79,285
--------- ---------
Cash and cash equivalents at end of period............................. $ 95,776 $ 59,713
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds............................ $ 12,931 $ 12,799
Income taxes....................................................... 8,383 1,614
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 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 six months ended June
30, 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) aggregated $1,929 and
have been deducted to arrive at net proceeds of $134,818 from the
Offering. The Company contributed 50% of the net proceeds of the
Offering to the Bank for general corporate use. Net Offering proceeds
retained by the Company were used to fund a loan to the Bank's employee
stock ownership plan 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)
Six Months Ended June 30, 1998 and 1997
(Unaudited)
(3) Employee Stock Ownership Plan (Dollars in Thousands)
----------------------------------------------------
On March 24, 1998, the Board of Directors of the Bank approved an
employee stock ownership plan (the "ESOP"). All employees meeting age
and service requirements are eligible to participate in the ESOP. The
ESOP is authorized to purchase up to 4% of the common stock sold in the
Offering, or 546,986 shares, in the open market and to borrow up to
$7,500 from the Company to finance the purchase of such shares. The loan
is payable in quarterly installments over 30 years and bears interest at
8.50% per annum. The loan can be prepaid without penalty. Loan payments
are to be funded by cash contributions from the Bank and dividends on
Company stock held by the ESOP.
As of June 30, 1998, the ESOP borrowed $1,981 from the Company to
purchase 122,500 shares of common stock in the open market. ESOP expense
of $109 was provided for the six months ended June 30, 1998 in
recognition of the 6,525 shares committed to be released as of that
date.
(4) Earnings per Share
------------------
Earnings per share is based on the weighted average number of shares
outstanding during the periods presented. The Company's "basic" and
"diluted" earnings per share computations are identical in the periods
presented, as there is no dilution effect. Earnings per share is not
presented for periods ending prior to April 1, 1998 since the Company
completed its offering on March 24, 1998 and, accordingly, such data
would not be meaningful.
The weighted average shares outstanding for the three month
period ended June 30, 1998 was calculated as follows:
<TABLE>
<CAPTION>
Shares Fraction Weighted
Dates Outstanding Outstanding of period Average shares
----------------- ----------- --------- --------------
<S> <C> <C> <C>
April 1 through June 30, 1998 29,095,000 100% 29,095,000
less unallocated ESOP shares
purchased during period (122,500) 77% (94,148)
ESOP shares committed to be
released during period 6,525 50% 3,262
========== ===
-----------
Weighted average shares 29,004,114
===========
</TABLE>
(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
8
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
Six Months Ended June 30, 1998 and 1997
(Unaudited)
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 June 30, 1998 and December 31, 1997, such taxes amounted to $8,819
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 its business is
comprised of a single operating segment and that SFAS No. 131 therefore
has no impact on its financial statements.
(7) Commitments and SWAP Agreement
------------------------------
At June 30, 1998, the Company had outstanding commitments to originate
loans of $66.5 million, $48.7 million of which were commercial real
estate and multi-family mortgage loans. Unused lines of credit available
to customers were $9.9 million, $8.5 million of which were equity lines
of credit.
Effective April 14, 1998, the Bank entered into an interest-rate swap
agreement with a third-party that matures April 14, 2005. The notional
amount of the agreement is $5.0 million. Under this agreement, each
quarter the Bank pays interest on the notional amount at an annual fixed
rate of 5.9375% and receives from the third-party interest on the
notional amount at the floating three month U.S. dollar LIBOR rate. The
Bank entered into this transaction to match more closely the repricing
of its assets and liabilities and to reduce its exposure to increases in
interest rates.
(8) Dividend Declaration
---------------------
On July 16, 1998, the Board of Directors of the Company approved and
declared a regular quarterly cash dividend of $.05 per share of common
stock to shareholders of record as of July 31, 1998 and payable as of
August 14, 1998.
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 June 30, 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 loan to the Bank's
employee stock ownership plan.
The reorganization has been accounted for as an "as if" pooling with assets
and liabilities recorded at historical cost. The unaudited consolidated
financial statements include the accounts of the Company, the Bank and 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 June 30, 1998 and December 31, 1997
Total assets increased by $134.2 million, or 19.1%, from $701.1 million at
December 31, 1997 to $835.3 million at June 30, 1998. The increase is primarily
attributable to the completion of the Company's Offering on March 24, 1998. Net
proceeds from the Offering amounted to $134.8 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
$14.8 million decline in deposits from $482.3 million at December 31, 1997 to
$467.5 million at June 30, 1998.
The net proceeds of the Offering were used primarily to acquire short-term
investments (including money market loan participations), debt obligations
maturing in three years or less, and 122,500 shares of the Company's common
stock for the Bank's employee stock ownership plan at an aggregate cost of $2.0
million. Money market 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. Money market loan participations
amounted to $34.6 million at June 30, 1998 and $24.0 million at December 31,
1997.
Excluding money market loan participations, the loan portfolio increased by
$22.3 million, or 4.7%, from $472.4 million at December 31, 1997 to $494.7
million at June 30, 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 $17.5 million to
$166.0 million, multi-family mortgage loans increased by $6.9 million to $224.6
million and construction mortgage loans increased by $2.9 million to $14.2
million during the six month period. Residential mortgage loans declined by $3.6
million to $65.2 million during the six month period.
Stockholders' equity increased from $132.8 million, or 18.9% of total
assets, at December 31, 1997 to $275.5 million, or 33.0% of total assets, at
June 30, 1998. The increase resulted from receipt of the net proceeds from the
Offering, net income earned and changes in other comprehensive income during the
six months ended June 30, 1998. Unrealized gains on securities available for
sale are reported as accumulated other comprehensive income. Such gains amounted
to $23.5 million ($14.7 million on an after-tax basis) at June 30, 1998 and
$22.0 million ($13.7 million on an after-tax basis) at December 31, 1997.
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>
June 30, December 31,
1998 1997
----------- -------------
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans:
Mortgage loans:
One-to-four family $ 78 $ 230
Commercial 300 522
Home equity 35 51
--------- ---------
Total non-accrual loans 413 803
Other real estate owned, net of allowance
for losses of $186 and $186, respectively 2,305 2,373
--------- ---------
Total non-performing assets $ 2,718 $ 3,176
========= =========
Restructured loans $ 2,287 $ 2,287
========= =========
Allowance for loan losses $ 12,566 $ 12,463
========= =========
Allowance for loan losses as a percent
of total loans 2.37% 2.51%
Allowance for loan losses as a percent
of total loans, excluding money market
participation loans 2.54 2.64
Non-accrual loans as a percent of total loans 0.08 0.16
Non-performing assets as a percent of
total assets 0.33 0.45
</TABLE>
During the six months ended June 30, 1998, there were no loan charge-offs
and $1,000 in recoveries of loans previously charged off. A $100,000 provision
for loan losses was recorded for the three months ended June 30, 1998 in
recognition of growth in the loan portfolio.
While management believes that, based on information currently available,
the allowance for loan losses is
11
<PAGE>
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
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 June 30, 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 portfolios and the interest paid on deposits and
borrowings. Operating results are also affected by provisions for loan losses,
the level of income from non-interest sources such as fees and sales of
investment securities and other assets, operating expenses and income taxes.
Operating results are also significantly affected by general economic
conditions, particularly changes in interest rates, as well as government
policies and actions of regulatory authorities.
Net income for the three months ended June 30, 1998 was $5.1 million
compared to $3.4 million for the three months ended June 30, 1997, an increase
of 52.6%. The 1998 period included $1.2 million of gains from sales of
securities ($768,000 on an after-tax basis) compared to $70,000 of gains
($46,000 on an after-tax basis) in the 1997 period. Excluding these amounts, the
increase in net income for the 1998 second quarter would have been $1.0 million,
or 31.5%. This level of increase resulted primarily from investment of the net
proceeds of the Offering and loan growth.
Interest rate spread (the difference between yields earned on assets and
rates paid on deposits and borrowings) declined from 3.11% for the three months
ended June 30, 1997 to 2.69% for the three months ended June 30, 1998. The
decline was attributable in part to having a greater percentage of earning
assets in short-term investments earning lower yields than in higher yielding
loans. Most of the net proceeds of the Offering were placed in short-term
investments and debt obligations maturing within two years. Also contributing to
the decline were lower yields on loans caused by borrowers taking advantage of a
falling interest rate environment. If current market trends continue, management
believes that interest rate spread could decline further.
Earnings per share of common stock was $0.18 for the three months ended
June 30, 1998. Securities gains on an after-tax basis amounted to $.03 per share
in that three month period. Per share data is not presented for periods prior to
April 1, 1998 because the Company converted to stock on March 24, 1998 and,
accordingly, did not have shares outstanding throughout the other periods
presented.
Interest Income
Interest income on loans, excluding money market participation loans,
increased from $10.0 million for the three months ended June 30, 1997 to $10.6
million for the three months ended June 30, 1998, or 6.1%. This rate of increase
was less than the 9.7% rate, or $42.6 million, of growth in average loans
outstanding (exclusive of money market participation loans) as a result of a
decline in the average yield on such loans from 9.01% in the 1997 quarter to
8.69% in the 1998 quarter. The reduction in loan yield is a reflection of the
falling interest rate environment of the past year. That environment 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. If interest
rates increase during the fixed rate phase of these loans, net interest income
could be negatively affected.
The average balances invested in money market participation loans in the
three months ended June 30, 1998 and 1997 were $51.3 million and $51.5 million,
respectively, and the yields earned on those balance were 5.75% and 5.74%,
respectively, resulting in little change in the income derived from such loans.
12
<PAGE>
Interest income from investment securities and short-term investments
increased 52.4% from $2.6 million for the three months ended June 30, 1997 to
$3.9 million for the three months ended June 30, 1998. The average balance of
the underlying assets increased $104.0 million, or 58.0%, during the comparable
quarters as most of the proceeds from the Offering were placed in short-term
investments and debt obligations maturing within two years. The average yield on
investments declined from 5.85% to 5.62% primarily as a result of short-term
investments comprising a greater portion of total investments.
Interest Expense
Interest expense on deposits was $5.1 million for the three months ended
June 30, 1998, a 5.3% decrease from the $5.4 million expended for the three
months ended June 30, 1997. The decrease resulted from a $17.2 million (3.6%)
reduction in average deposits outstanding during the comparable quarters and a
lower average rate paid on such deposits (4.57% in 1997 and 4.50% in 1998). The
decline in deposit balances was due primarily to withdrawals by eligible
depositors for purchase of stock in the Offering. Falling interest rates also
affected deposit flows.
The Bank increased its use of borrowings from the Federal Home Loan Bank of
Boston (the "FHLB") as part of its management of interest rate risk. Total
advances outstanding were $78.4 million at June 30, 1998 compared to $69.3
million at December 31, 1997. The average rate paid on advances outstanding
during the three months ended June 30, 1997 and 1998 declined from 6.53% to
6.44%.
Non-Interest Income
Sales of marketable equity securities during the three months ended June
30, 1998 and 1997 resulted in gains of $1.2 million and $70,000, respectively.
Marketable equity securities are held by the Company primarily for capital
appreciation and not for trading purposes. The increase in fees and charges
between the 1998 and 1997 three month periods resulted primarily from loan
prepayments.
Non-Interest Expense
Total non-interest expense increased 10.2% from $2.1 million for the three
months ended June 30, 1997 to $2.3 million for the three months ended June 30,
1998. Most of the increase resulted from higher compensation and employee
benefits expense caused by the addition of a chief financial officer and a loan
officer in June 1997 and two additional loan officers in the second quarter of
1998, higher fees for Board meetings and a $109,000 provision for ESOP expense.
The ESOP went into effect in the second quarter of 1998. The increase in other
expense categories was due in part to being a public company and higher costs
for legal matters.
Income Taxes
The effective rate of income tax expense was 36.6% for the three months
ended June 30, 1998 compared to 34.2% for the three months ended June 30, 1997.
The Company paid a lower federal rate in 1997 because its taxable earnings for
the year ended October 31, 1997 were below the threshold at which the maximum
federal rate must be applied. In addition, the state income tax rate was lower
because of the creation of a real estate investment trust subsidiary in 1997 and
greater utilization of investment security subsidiaries.
Comparison of Operating Results for the Six Months Ended June 30, 1998 and 1997
General
Net income for the six months ended June 30, 1998 was $8.9 million compared
to $7.0 million for the six months ended June 30, 1997, an increase of 28.0%.
The 1998 period included $1.2 million of gains from sales of securities
($773,000 on an after-tax basis) compared to $74,000 of gains ($48,000 on an
after-tax basis) in the 1997 period. Also
13
<PAGE>
included in the 1997 period was $908,000 ($529,000 on an after-tax basis) 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
interest and the securities gains, the increase in net income for the six month
periods would have been $1.8 million, or 27.4%. Loan growth and investment of
the net proceeds of the Offering were the primary reasons for the earnings
improvement.
Interest rate spread declined from 3.11% for the 1997 period to 2.91% for
the 1998 period as a result of lower yields on loans without a corresponding
reduction in rates paid on deposits and borrowings. Regarding expenses, the 1998
period includes a $100,000 provision for loan losses and $109,000 for the ESOP
put into effect at the time of the Offering. There were no expenses for these
items in the 1997 period.
Interest Income
Interest income on loans, excluding money market participation loans and
the $908,000 of interest referred to in the preceding section, increased from
$19.7 million for the 1997 period to $21.1 million for the 1998 period, an
increase of 7.0%. The positive benefit derived from a 9.7% rate, or $42.6
million, of growth in average loans outstanding (exclusive of money market
participation loans) between the 1998 and 1997 periods was offset in part by a
decline in the average yield on such loans from 9.01% in the 1997 period to
8.78% in the 1998 period. The reduction in loan yield was due to the falling
interest rate environment of the past year.
Interest income on money market participation loans declined by 11.4% to
$1.3 million in the 1998 period as a result of a 12.6%, or $6.7 million, decline
in the average amount invested in such loans. The increase in income from
securities and short-term investments resulted substantially from investment of
the net proceeds of the Offering. The average yield on such investments declined
from 5.78% in the 1997 period to 5.59% in the 1998 period as the percent of
balances maintained in short-term investments was higher in the 1998 period than
in the 1997 period. Because of the flat yield curve in existence for the past
several months, management has restricted its investment purchases to securities
with short maturities.
Interest Expense
The average balance of deposits declined by $6.1 million, or 1.3%, to
$467.9 million for the six months ended June 30, 1998 as a result of some of the
subscribers in the Offering electing to pay for their stock by withdrawal from
their deposit accounts. The average rate paid on deposits was 4.49% in the 1998
period compared to 4.54% in the 1997 period. In addition to interest paid on
deposits, interest of $275,000 was paid in the 1998 period on funds received
from subscribers prior to completion of the Offering. The rate paid on such
funds was 2.50%.
The average balance of borrowings from the FHLB increased from $62.9
million in the 1997 period to $68.4 million in the 1998 period. Such borrowings
were made primarily in connection with management of the Bank's interest rate
risk. The average rate paid on the borrowings was 6.40% in the 1998 period
compared to 6.49% in the 1997 period.
Non-Interest Income
Gains from sales of marketable equity securities were $1.2 million in the
1998 period compared to $74,000 in the 1997 period. The increase in fees and
charges between the 1998 and 1997 periods resulted primarily from loan
repayments.
Non-Interest Expense
Total non-interest expense increased 4.3% from $4.3 million for the 1997
period to $4.5 million for the 1998 period. Compensation and employee benefits
increased by $171,000, or 6.7%. The ESOP, which went into effect in
14
<PAGE>
the second quarter of 1998, accounted for $109,000 of the increase. The added
expense resulting from the hiring of a chief financial officer and a loan
officer in June 1997 and higher fees for Board meetings was offset by a
reduction in expenses for supplemental executive and employee retirement
benefits and performance bonuses.
Equipment and data processing expense of $596,000 for the 1998 period
included a provision of $50,000 relating to the Company's efforts to comply with
Year 2000 requirements. Included in the 1997 period were expenses relating to
the Bank's conversion to a new computer system.
Income Taxes
The effective rate of income tax expense was 36.3% for the 1998 period
compared to 35.0% for the 1997 period. The Company paid a lower federal rate in
1997 because its taxable earnings for the tax year ended October 31, 1997 were
below the threshold at which the maximum federal rate must be applied. The rate
of state income taxes was low in both years because of the utilization of a real
estate investment trust subsidiary and investment security subsidiaries.
Asset/Liability Management
The Bank's Asset/Liability Committee is responsible for managing interest
rate risk and reviewing with the Board of Directors on a quarterly basis its
activities and strategies, the effect of those strategies on the Bank's
operating results, the Bank's interest rate risk position and the effect changes
in interest rates would have on the Bank's net interest income.
Generally, it is the Bank's policy to reasonably match the rate sensitivity
of its assets and liabilities. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. Also taken into
consideration are interest rate swap agreements entered into by the Bank. At
June 30, 1998, interest-earning assets maturing or repricing within one year
amounted to $402.8 million and interest-bearing liabilities maturing or
repricing within one year amounted to $413.2 million resulting in a cumulative
one-year negative gap position of $10.4 million, or 1.2% 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 FHLB. In March
1998, $134.8 million of net proceeds from the Offering added significantly to
the funds available to the Company for use in conducting its business. While
maturities and scheduled amortization of loans and investments are predictable
sources of funds, deposit flows and mortgage loan prepayments are greatly
influenced by interest rate trends, economic conditions and competition.
During the past few years, the combination of generally low interest rates
on deposit products and the attraction of alternative investments such as mutual
funds and annuities has resulted in little growth or a net decline in deposits
in certain time periods. Based on its monitoring of historic deposit trends and
its current pricing strategy for deposits, management believes the Bank will
retain a large portion of its existing deposit base.
From time to time, the Bank utilizes advances from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. During the six months ended June 30, 1998, the Bank repaid
advances of $11.6 million and obtained new advances of $20.8 million. Total
advances outstanding at June 30, 1998 amounted to $78.4 million.
The Bank's most liquid assets are cash and due from banks, short-term
investments, debt securities and money market loan participations that generally
mature within 90 days. At June 30, 1998, such assets amounted to $95.8 million,
or 11.5% of total assets.
15
<PAGE>
At June 30, 1998, the Company and the Bank exceeded all regulatory capital
requirements. The Bank's leverage capital was $193.0 million, or 26.2% 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 expensed $50,000 during the six months ended June 30, 1998 and
expects to incur additional 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. Some of the costs are not expected to be incremental to the Company,
but rather represent new equipment and software that would otherwise be
purchased in the normal course of the Company's business. The Company presently
believes the Y2K issue will not pose significant operating problems for the
Company. However, if implementation and testing plans are not completed in a
satisfactory and timely manner, in particular by third parties on 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 pending litigation would be immaterial to the consolidated financial
condition or results of operations of the Company.
16
<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) aggregated $2.0 million and have been deducted to arrive at net
proceeds of $134.8 million from the Offering. The Company contributed 50% of the
net proceeds of the Offering to the Bank for general corporate use. Net Offering
proceeds retained by the Company were used to acquire short-term investments and
fund a 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.
17
<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: July 29, 1998 By: /S/ Richard P. Chapman, Jr.
---------------------------------------
Richard P. Chapman, Jr.
President and Chief Executive Officer
Date: July 29, 1998 By: /S/ Paul R. Bechet
---------------------------------------
Paul R. Bechet
Senior Vice President and Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,261
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 51,375
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 148,827
<INVESTMENTS-CARRYING> 94,324
<INVESTMENTS-MARKET> 94,444
<LOANS> 529,341
<ALLOWANCE> 12,566
<TOTAL-ASSETS> 835,329
<DEPOSITS> 467,465
<SHORT-TERM> 78,415
<LIABILITIES-OTHER> 13,911
<LONG-TERM> 0
0
0
<COMMON> 291
<OTHER-SE> 275,247
<TOTAL-LIABILITIES-AND-EQUITY> 835,329
<INTEREST-LOAN> 11,468
<INTEREST-INVEST> 3,899
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 15,367
<INTEREST-DEPOSIT> 5,136
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<INTEREST-INCOME-NET> 9,093
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 1,238
<EXPENSE-OTHER> 2,331
<INCOME-PRETAX> 8,114
<INCOME-PRE-EXTRAORDINARY> 5,143
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,143
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
<YIELD-ACTUAL> 4.40
<LOANS-NON> 413
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<LOANS-TROUBLED> 2,287
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</TABLE>
