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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from
---------------- to ----------------
Commission file number: 0-23695
BROOKLINE BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Massachusetts 04-3402944
(State or other jurisdiction of incorporation of organization) (I.R.S. Employer Identification No.)
160 Washington Street, Brookline, MA 02447-0469
(Address of principal executive offices) (Zip Code)
</TABLE>
(617) 730-3500
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, par value of $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
The number of shares of common stock held by nonaffiliates of the
registrant as of March 23, 1999 was 12,808,913 for an aggregate market value of
$142,499,158. This excludes 15,420,350 shares held by Brookline Bancorp, MHC and
381,237 shares held by Brookline Savings Bank Employee Stock Ownership Plan and
Trust.
At March 23, 1999, the number of shares of common stock, par value $.01 per
share, issued and outstanding were 29,095,000 and 28,610,500, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of the Annual Report to Stockholders for the year ended December
31, 1998 (Part II and Part III)
2. Proxy Statement for 1999 Annual Meeting of Stockholders (Part III)
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<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-K
Index
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Part I Page
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Item 1. Business 1
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission Of Matters To A Vote Of Security Holders 20
Part II
Item 5. Market For The Registrant's Common Stock And
Related Security Holder Matters 21
Item 6. Selected Consolidated Financial Data 21
Item 7. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations 21
Item 7a. Quantitative And Qualitative Disclosures About Market Risk 21
Item 8. Financial Statements And Supplementary Data 21
Item 9. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosures 21
Part III
Item 10. Directors and Executive Officers Of The Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership Of Certain Beneficial Owners
And Management 22
Item 13. Certain Relationships And Related Transactions 22
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 22
Signatures 24
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<PAGE>
PART I
Item 1. Business
General
Brookline Bancorp, Inc. (the "Company") is a bank holding company
incorporated in Massachusetts that was organized in November 1997 for the
purpose of acquiring all of the capital stock of Brookline Savings Bank (the
"Bank") upon completion of the Bank's reorganization from a mutual savings bank
into a mutual holding company structure. The Bank is a Massachusetts savings
bank established in 1871.
As part of the reorganization, the Company offered for sale 47%
of the shares of its common stock in an offering fully subscribed for by
eligible depositors of the Bank (the "Offering"). The remaining 53% of the
Company's shares of common stock were issued to Brookline Bancorp, MHC (the
"MHC"), a state-chartered mutual holding company incorporated in Massachusetts.
The reorganization and Offering were completed on March 24, 1998. Prior to that
date, the Company had no assets and liabilities.
Completion of the Offering resulted in the issuance of 29,095,000
shares of common stock, 15,420,350 shares (53%) of which were issued to the MHC
and 13,674,650 shares (47%) of which were sold to eligible depositors of the
Bank at $10.00 per share. The net proceeds of the Offering were $134.8 million.
The Company contributed 50% of the net proceeds to the Bank for general
corporate use and retained the other 50%. The Company used the net proceeds it
retained to fund a loan to the Bank's employee stock ownership plan, acquire
investment securities and repurchase shares of the Company's common stock in the
open market.
Market Area and Credit Risk Concentration
The Bank operates five full-service banking offices in the Town
of Brookline, an urban/suburban community adjacent to the City of Boston, and a
loan production office in Worcester, Massachusetts opened in July 1998.
Worcester is the second largest city in New England. The Bank's deposits are
gathered from the general public primarily in the Town of Brookline and
surrounding communities. The Bank's lending activities are concentrated
primarily in the greater Boston metropolitan area and eastern Massachusetts. The
opening of the Worcester office has expanded the Bank's lending activities in
central Massachusetts. The greater Boston metropolitan area benefits from the
presence of numerous institutions of higher learning, medical care and research
centers and the corporate headquarters of several significant mutual fund
investment companies. Eastern Massachusetts also has many high technology
companies employing personnel with specialized skills. These factors affect the
demand for residential homes, multi-family apartments, office buildings,
shopping centers, industrial warehouses and other commercial properties.
The Bank's urban and suburban market area is characterized by a
large number of apartment buildings, condominiums and office buildings. As a
result, for many years, the Bank has emphasized multi-family and commercial real
estate mortgage lending. These types of loans typically generate higher yields,
but also involve greater credit risk than one-to four-family mortgage loans.
Many of the Bank's borrowers have more than one muti- family or commercial real
estate loan outstanding with the Bank. Moreover, the loans are concentrated in
the market area described in the preceding paragraph.
Economic Conditions and Governmental Policies
The earnings and business of the Company are affected by external
influences such as general economic conditions and the policies of governmental
authorities, including the Federal Reserve Board. The Federal Reserve Board
regulates the supply of money and bank credit to influence general economic
conditions throughout the
1
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United States. The instruments of monetary policy employed by the Federal
Reserve Board affect interest rates earned on investment securities and loans
and interest rates paid on deposits and borrowed funds.
Repayment of loans made by the Bank, in particular multi-family
and commercial real estate loans, generally is dependent on sufficient income
from the properties to cover operating expenses and debt service. Accordingly,
the asset quality of the Bank's loan portfolio is greatly affected by the
economy in the Bank's market area. During the past few years, the Massachusetts
economy has been strong and interest rates have been declining. While these
conditions, for the most part, have had a favorable impact on property values
and the business of the Bank and its borrowers, declining interest rates have
prompted many borrowers to refinance existing loans and seek new loans at lower
interest rates fixed for longer periods of time. Besides causing pressure on the
Bank's interest rate margin, the low interest rate environment has resulted in
minimal deposit growth as customers have found other investment instruments more
attractive. During the late 1980s and early 1990s, a regional recession and a
higher interest rate environment caused a significant decline in employment and
in real estate values, ultimately resulting in the failure of many financial
institutions in Massachusetts and New England.
Competition
The Bank faces significant competition both in making loans and
in attracting deposits. The Boston metropolitan area has a high density of
financial institutions, many of which are branches of significantly larger
institutions which have greater financial resources than the Bank, and all of
which are competitors of the Bank to varying degrees. The Bank's competition for
loans comes principally from commercial banks, savings banks, savings and loan
associations, mortgage banking companies, credit unions, insurance companies and
other financial service companies. Its most direct competition for deposits has
historically come from commercial banks, savings banks, savings and loan
associations and credit unions. The Bank faces additional competition for
deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions.
Supervision and Regulation
General
The Company and the Bank are subject to extensive regulation
under federal and state banking laws and regulations. Both must obtain
regulatory approvals prior to entering into certain transactions including, but
not limited to, mergers with and acquisitions of other financial institutions.
The following discussion of certain of the material elements of the regulatory
framework applicable to banks and bank holding companies is not intended to be
complete and is qualified in its entirety by the text of the relevant federal
and state statutes and regulations. Changes in applicable laws and regulations
could have a material effect on the business of the Company and the Bank.
As a bank holding company, the Company is subject to
comprehensive regulation and examination by the Board of Governors of the
Federal Reserve System (the "FRB") under the Bank Holding Company Act of 1956,
as amended (the "BHC Act"). The Company is required to file reports with the FRB
concerning its activities and financial condition. As a Massachusetts
corporation, the Company is also subject to regulation by the Massachusetts
Division of Banks (the "Division").
The Bank is subject to extensive regulation and examination by
the Division, as its chartering agency, and the Federal Deposit Insurance
Corporation (the "FDIC"), as its insurer of deposits to the extent permitted by
law. The Bank is required to file reports with, and is examined periodically by,
the Division and the FDIC concerning its activities and financial condition. The
Bank is also a member of the Federal Home Loan Bank of Boston (the "FHLB").
2
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Bank Holding Company Regulation
General. The FRB has extensive enforcement authority over bank
holding companies, including, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to require that
a holding company divest subsidiaries (including its bank subsidiaries). In
general, enforcement actions may be initiated for violations of law and
regulations and unsafe or unsound practices against the company, its
subsidiaries, and officers, directors and other institution-affiliated parties.
The Company must obtain the approval of the FRB and the
Massachusetts Board of Bank Incorporation before (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares (unless it already owns or controls the majority of such shares),
(ii) acquiring all or substantially all of the assets of another bank or bank
holding company or (iii) merging or consolidating with another bank holding
company.
Bank holding companies are generally prohibited from engaging in
non-banking activities, subject to certain exceptions. As a bank holding
company, the Company's activities are limited generally to the business of
banking and activities determined by the FRB to be so closely related to banking
as to be a proper incident thereto. The Company cannot engage, directly,
indirectly or in any manner, in any real estate investment or development
activities without the prior approval of the FRB.
Interstate Banking and Branching. Federal law permits adequately
capitalized and managed bank holding companies to acquire control of banks in
any state subject to certain deposit and other limitations. Further, banks in
Massachusetts are allowed by federal and state law to establish and maintain
branches through a merger or consolidation with or by the purchase of the whole
or any part of the assets or stock of any out-of-state bank or through de novo
branch establishment in any state other than Massachusetts. Since the
Massachusetts law is reciprocal, financial institutions in states with
reciprocity arrangements could enter Massachusetts through acquisition of or
merger with a Massachusetts financial institution or through establishment of
branches.
Transactions with Affiliates. The Bank and its subsidiaries are
subject to a number of regulatory restrictions, including certain restrictions
regarding (i) extensions of credit to the Company and the Company's nonbanking
affiliates (collectively with the Company, the "Affiliates"); (ii) the purchases
of assets from Affiliates; (iii) the issuance of a guarantee or acceptance of a
letter of credit on behalf of Affiliates; and (iv) investments in stock or other
securities issued by Affiliates or acceptance thereof as collateral for an
extension of credit. Further, all transactions among the Company and its direct
and indirect subsidiaries must be made on an arm's length basis and fair market
terms.
Massachusetts Bank Regulation
General. As a Massachusetts-chartered savings bank, the Bank is
subject to supervision, regulation and examination by the Division and to
various Massachusetts statutes and regulations which govern, among other things,
investment powers, lending and deposit-taking activities, borrowings,
maintenance of surplus and reserve accounts, distribution of earnings and
payment of dividends. In addition, the Bank is subject to Massachusetts consumer
protection and civil rights laws and regulations. The Division's approval is
required for a Massachusetts bank to establish or close branches, merge with
other banks, organize a holding company, issue stock and undertake certain other
activities.
Any Massachusetts bank that does not operate in accordance with
the regulations, policies and directives of the Massachusetts Commissioner of
Banks (the "Commissioner") may be subject to sanctions for non-compliance
including, among other things, suspension or revocation of its charter. The
Commissioner may, under certain circumstances, suspend or remove officers or
directors who have violated the law, conducted the Bank's business in a manner
unsafe, unsound or contrary to depositors' interests, or been negligent in the
performance of their duties.
3
<PAGE>
Bank Powers and Investment Activities. Generally, Massachusetts
banks have powers equivalent to those of national banks. In addition, the Bank
may invest in preferred and common stock of any corporation provided such
investments do not involve control of any corporation and do not, in the
aggregate, exceed 4% of the Bank's deposits. Subject to certain limits, the Bank
may also invest in investments not otherwise legally permitted.
Depositors Insurance Fund. All Massachusetts-chartered savings
banks are required to be members of the Depositors Insurance Fund (the "DIF"), a
corporation that insures savings bank deposits not covered by federal deposit
insurance. The DIF is authorized to charge savings banks an annual assessment of
up to 1/16th of 1% of a savings bank's deposits insured by the DIF.
Federal Deposit Insurance Corporation
The FDIC insures the Bank's deposit accounts to the $100,000
maximum per separately insured account. The Bank is subject to regulation,
examination and supervision by and the reporting requirements of the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") made extensive changes to the federal banking law. Among other
things, FDICIA requires federal bank regulatory agencies to take prompt
corrective action to address the problems of under-capitalized banks. FDICIA
also amended statutes governing extensions of credit to directors, executive
officers and principal stockholders of banks and their holding companies.
Prompt Corrective Action
The federal banking agencies have promulgated regulations to
implement the system of prompt corrective action required by federal law. Under
the regulations, a bank shall be deemed to be (i) "well capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
"Undercapitalized" banks are subject to growth, capital
distribution (including dividend) and other limitations and are required to
submit a capital restoration plan. A bank's compliance with such plan is
required to be guaranteed by any company that controls the undercapitalized
institution. If an "undercapitalized" bank fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks are subject to one or more of a number of additional
restrictions, including an order by the FDIC to sell sufficient voting stock to
become adequately capitalized, requirements to reduce total assets and cease
receipt of deposits from correspondent banks or to dismiss directors or
officers, and restrictions on interest rates paid on deposits, compensation of
executive officers and capital distributions by a parent holding company.
Based on the foregoing, the Company is currently classified as
"well capitalized".
4
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Standards for Safety and Soundness
The federal agencies have adopted Interagency Guidelines
Prescribing Standards for Safety and Soundness ("Guidelines"). The Guidelines
set forth standards for use by federal banking agencies to identify and address
problems at insured depository institutions before capital becomes impaired. The
standards address internal controls and information systems, internal audit
program, credit underwriting, loan documentation, interest rate risk exposure,
asset growth, and compensation, fees and benefits. The standards also require
institutions to examine asset quality and earnings standards. If a federal
banking agency determines that an institution fails to meet any of the
prescribed standards, the agency may require the institution to submit to the
agency an acceptable plan to achieve compliance with the standards.
Limitations on Dividends and Other Capital Transactions
The FRB has issued a policy statement expressing their view that
a bank holding company should pay cash dividends only to the extent that its net
income for the past year is sufficient to cover both the cash dividends and a
rate of earnings retention that is consistent with the holding company's capital
needs, asset quality and overall financial condition. The FRB may prohibit a
bank holding company from paying any dividends if its bank subsidiary is
classified as "undercapitalized."
The FRB has imposed certain restrictions regarding the waiving of
dividend payments by the Company to its mutual holding company parent. To date,
the mutual holding company has not waived any dividends paid by the Company. If,
in the future, the mutual holding company sought to waive dividends paid by the
Company and obtained the approval of the FRB to do so, the cumulative amount of
waived dividends would not be available for payment by the Company to minority
stockholders and would be maintained in a restricted capital account. While such
account would not have to be reflected in the Company's financial statements, it
would not be available for distribution to minority stockholders if the mutual
holding company parent decided to convert to stock form in the future.
The FDIC has the authority to use its enforcement powers to
prohibit a savings bank from paying dividends if, in its opinion, the payment of
dividends would constitute an unsafe and unsound practice. Federal law also
prohibits the payment of dividends by a bank that will result in the bank
failing to meet its applicable capital requirements. Massachusetts law also
restricts the Bank from declaring a dividend that would reduce its capital below
(i) the amount required to be maintained by state and federal law and
regulations or (ii) the amount of the Bank's liquidation account established in
connection with the Bank's reorganization.
Under the Division's regulations, the Company is prohibited from
repurchasing any shares of its stock within three years of its date of issuance
unless the repurchase is limited to stock repurchases of no greater than 5% of
the Company's stock where compelling and valid business reasons are established
to the satisfaction of the Commissioner. On October 20, 1998, the Company
received the approval of the Commissioner to repurchase up to 5% of its
outstanding common stock, or 1,454,750 shares. There is no time limit by which
the Company must repurchase the shares.
Community Reinvestment Act
Under the Community Reinvestment Act (the "CRA") and a
Massachusetts statutory counterpart, the Bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The Bank is subject to examination by the FDIC and the Division
regarding its compliance with CRA requirements. The Bank's latest ratings from
examinations conducted by the FDIC and the Division were "satisfactory."
5
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Financial Modernization
Various federal legislative proposals are pending to "modernize"
the nation's financial system. Although the proposals vary, most generally would
expand the powers of financial institutions by permitting a combination of
banking and commercial functions.
Federal Securities Law
The common stock of the Company is registered with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act"). The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act. The Company is also required to file annual, quarterly and
periodic reports with the SEC.
Federal Home Loan Bank System
The Federal Home Loan Bank system functions as a reserve credit
source for its member financial institutions and is subject to the regulation
and oversight of the Federal Housing Finance Board. The Bank is a voluntary
member of the Federal Home Loan Bank of Boston ("FHLB"). As a member, the Bank
is required to own FHLB capital stock that is directly proportionate to its home
mortgage loans and borrowings from the FHLB. All borrowings from the FHLB are
required to be fully secured by sufficient collateral as determined by the FHLB.
Investment Securities
The investment policy of the Company is reviewed and approved by
the Board of Directors on an annual basis. The Company's investment portfolio is
structured so as to provide asset diversification, interest and dividend income,
a source of liquidity to meet loan demand and potential deposit outflows, and
the opportunity to achieve capital appreciation through long-term investment in
equity securities.
The Bank's current policy generally favors investment in U.S.
Government and Agency securities, corporate debt obligations and corporate
equities. The policy permits investment in mortgage-backed and mortgage-related
securities and allows the use of interest rate swaps, options and futures, but
only for purposes of hedging the interest or credit risk of specific Company
assets. While the Company has seldom used hedging instruments, at December 31,
1998, it was a party to a $5.0 million interest-rate swap agreement that matures
April 14, 2005. The Company entered into the agreement to match more closely the
repricing of certain assets and liabilities and to reduce its exposure to
increases in interest rates.
For the past few years, the Company's investment strategy has
emphasized the purchase of U.S. Government and Agency obligations and corporate
debt obligations generally maturing within two years. The Company's investment
policy generally requires that corporate obligations be rated "A" or better at
the time of acquisition. In certain instances, corporate obligations rated "BBB"
can be purchased. At December 31, 1998, only $2.0 million of the Company's debt
securities were rated "BBB" or "Baa".
At December 31, 1998, the Company's marketable equity securities
portfolio totaled $30.6 million, including net unrealized gains of $22.7
million. Most of the portfolio was comprised of the stocks of national and
regional money center banks, Freddie Mac and utility companies. The Company's
policy limits the aggregate carrying value of marketable equity securities to no
more than 25% of the Company's stockholder's equity, excluding net unrealized
gains on securities available for sale. The Company purchases marketable equity
securities as long-term investments that can provide the opportunity for capital
appreciation and dividend income that is taxed on a more favorable basis than
operating income. There can be no assurances that investment in marketable
equity securities will achieve appreciation in value and, therefore, such
investments involve higher risk.
6
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In the latter part of 1998, the Company commenced purchasing
collateralized mortgage obligations with expected maturities in the two-to-four
year range. These securities were purchased for their yield which compared
favorably to yields on other debt instruments available for comparable periods
of time.
The following table sets forth the composition of the Company's debt
and equity securities portfolios at the dates indicated:
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At December 31,
----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Percent Percent Percent
Amount of total Amount of total Amount of total
-------- -------- ------- -------- -------- --------
(Dollars in thousands)
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Debt securities:
U.S. Government and Agency obligations... $ 92,824 35.69% $82,319 44.07% $ 70,055 43.12%
Corporate obligations.................... 124,609 47.91 71,480 38.26 65,808 40.50
Collateralized mortgage obligations
and mortgage-backed securities........ 6,891 2.65 1,265 0.68 2,764 1.70
-------- ------- ------- ------ -------- -------
Total debt securities.................. 224,324 86.25 155,064 83.01 138,627 85.32
Marketable equity securities................ 30,595 11.76 28,017 15.00 20,365 12.54
Restricted equity securities................ 5,174 1.99 3,721 1.99 3,481 2.14
-------- ------- ------- ------ -------- -------
Total securities....................... $260,093 100.00% $186,802 100.00% $162,473 100.00%
======== ======= ======== ====== ======== =====
Debt and equity securities available for sale $133,529 51.34% $117,637 62.98% $117,372 72.24%
Debt securities held to maturity............ 121,390 46.67 65,444 35.03 41,620 25.62
Restricted equity securities................ 5,174 1.99 3,721 1.99 3,481 2.14
-------- ------- ------- ------ -------- -------
Total securities....................... $260,093 100.00% $186,802 100.00% $162,473 100.00%
======== ======= ======== ====== ======== =======
</TABLE>
The increase in the investment portfolio from $186.8 million at the
end of 1997 to $260.1 million at the end of 1998 resulted from placement of a
significant amount of the net proceeds from the Offering in debt securities.
Over time, the Company expects to reduce the percentage of its assets in debt
securities as growth takes place in the loan portfolio.
7
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The following table sets forth certain information regarding the
amortized cost and market values of the Company's investment securities at the
dates indicated:
<TABLE>
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At December 31,
--------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- --------------------
Amortized Market Amortized Market Amortized Market
cost value cost value cost value
------- -------- ------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations... $ 88,186 $ 88,810 $ 74,088 $ 74,287 $ 57,089 $ 57,104
Corporate obligations.................... 8,218 8,183 15,341 15,333 39,890 39,903
Collateralized mortgage obligations...... 5,982 5,941 - - - -
-------- -------- -------- -------- -------- --------
Total debt securities.................. 102,386 102,934 89,429 89,620 96,979 97,007
Marketable equity securities................ 7,939 30,595 6,168 28,017 6,703 20,365
-------- -------- -------- -------- -------- --------
Total securities available for sale.... 110,325 133,529 95,597 117,637 103,682 117,372
Net unrealized gains on securities
available for sale........................ 23,204 - 22,040 - 13,690 -
-------- -------- -------- -------- -------- --------
Total securities available for sale, net $133,529 $133,529 $117,637 $117,637 $117,372 $117,372
======== ======== ======== ======== ======== ========
Securities held to maturity:
U.S. Government and Agency obligations...... $ 4,014 $ 4,038 $ 8,032 $ 8,032 $ 12,951 $ 12,953
Corporate obligations....................... 116,426 117,012 56,147 56,254 25,905 25,935
Mortgage-backed securities.................. 950 993 1,265 1,314 2,764 2,807
-------- -------- -------- -------- -------- --------
Total securities held to maturity........ $121,390 $122,043 $ 65,444 $ 65,600 $ 41,620 $ 41,695
======== ======== ======== ======== ======== ========
Restricted equity securities:
Federal Home Loan Bank of Boston stock...... $ 4,921 $ 3,468 $ 3,228
Massachusetts Savings Bank Life Insurance
Company stock............................. 253 253 253
-------- -------- --------
Total restricted equity securities....... $ 5,174 $ 3,721 $ 3,481
======== ======== ========
</TABLE>
8
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The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company's
securities portfolio as of December 31, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------------------------------------
After one year After five years
One year or less through five years through ten years
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
Carrying average Carrying average Carrying average
value yield value yield value yield
------- ------- ------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations......... $47,265 4.84% $ 41,545 4.89% $ - - %
Corporate obligations.......................... 999 6.12 6,665 5.59 - -
Collateralized mortgage obligations............ - - 5,941 5.74 - -
------- -------- ----
Total debt securities........................ 48,264 4.87 54,151 5.07 - -
------- -------- ----
Marketable equity securities(1)...................
Total securities available for sale..........
Securities held to maturity:
U.S. Government and Agency obligations............ 4,014 5.82 - - - -
Corporate obligations............................. 41,903 6.19 74,023 5.73 500 5.82
Mortgage-backed securities........................ - - - - 366 8.22
------- -------- -----
Total securities held to maturity............ 45,917 6.16 74,023 5.73 866 6.83
------- -------- -----
Restricted equity securities:
Federal Home Loan Bank of Boston stock............
Massachusetts Savings Bank Life Insurance
Company stock(1).............................
Total restricted equity securities(1)........
------- -------- ------
Total securities............................. $94,181 5.50% $128,174 5.45% $ 866 6.83%
======= ======== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------
After ten years Total
-------------------- --------------------
Weighted Weighted
Carrying average Carrying average
value yield value yield
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations......... $ - - % $ 88,810 4.86%
Corporate obligations.......................... 519 5.59 8,183 5.65
Collateralized mortgage obligations............ - - 5,941 5.74
------ --------
Total debt securities........................ 519 5.59 102,934 4.98
------
Marketable equity securities(1)................... 30,595 2.40
--------
Total securities available for sale.......... 133,529 4.39
--------
Securities held to maturity:
U.S. Government and Agency obligations............ - - 4,014 5.82
Corporate obligations............................. - - 116,426 5.90
Mortgage-backed securities........................ 584 9.16 950 8.80
------ -------
Total securities held to maturity............ 584 9.16 121,390 5.92
------ --------
Restricted equity securities:
Federal Home Loan Bank of Boston stock............ 4,921 6.50
Massachusetts Savings Bank Life Insurance
Company stock(1)............................. 253 4.18
--------
Total restricted equity securities(1)........ 5,174 6.39
------ --------
Total securities............................. $1,103 7.48% $260,093 5.14%
====== ========
</TABLE>
- - ------------------
(1) The yields have been calculated on a tax equivalent basis.
9
<PAGE>
Loans
The Company's loan portfolio consists primarily of first mortgage
loans secured by multi-family, commercial and one-to-four family residential
real estate properties located in the Company's primary lending area. Another
component of the loan portfolio consists of participations in commercial loans
to national companies and organizations originated and serviced primarily by
money center banks. Generally, the participations mature between one day and
three months and are viewed by the Company as an alternative short-term
investment for liquidity management purposes rather than as traditional
commercial loans. The Company also provides financing for construction and
development projects, commercial lines of credit primarily to condominium
associations, home equity and second mortgage loans and other consumer loans.
The Company relies on community contacts as well as referrals from
existing customers, attorneys and other real estate professionals to generate
business within its lending area. In addition, existing borrowers are an
important source of business since many of its multi-family and commercial real
estate customers have more than one loan outstanding with the Company. A
commissioned loan originator on the staff of the Company is also used to
generate residential mortgage loan business. The Company's ability to originate
loans depends on the strength of the economy, trends in interest rates, customer
demands and competition.
Multi-family and commercial real estate mortgage lending are the
Company's most significant areas of lending activities. At December 31, 1998 and
1997, such loans represented 79.9% and 76.4 %, respectively, of gross loans,
exclusive of money market loan participations. The Company intends to continue
to emphasize these types of loans depending on the demand for such loans and
trends in the real estate market and the economy.
The Company has written underwriting policies to control the inherent
risks in origination of loans. The policies address approval limits,
loan-to-value ratios, appraisal requirements, debt service coverage ratios, loan
concentration limits and other matters relevant to loan underwriting.
A number of factors are considered in originating multi-family and
commercial real estate mortgage loans. The qualifications and financial
condition of the borrower (including credit history), profitability and
expertise, as well as the value and condition of the underlying property, are
evaluated. When evaluating the qualifications of the borrower, the Company
considers the financial resources of the borrower, the borrower's experience in
owning or managing similar property and the borrower's payment history with the
Company and other financial institutions. Factors considered in evaluating the
underlying property include the net operating income of the mortgaged premises
before debt service and depreciation, the debt service coverage ratio (the ratio
of net operating income to debt service) and the ratio of the loan amount to the
appraised value.
Frequently, multi-family and commercial real estate mortgage loans are
made for five to ten year terms, with an amortization period of twenty to
twenty-five years, and are priced on an adjustable-rate basis with the
borrower's option to fix the interest rate for the first few years. At the
borrower's option, at the time of origination or later during the term, the loan
may be converted to a fixed rate, provided the fixed-rate period selected by the
borrower does not exceed the original term of the loan. When fixed-rate loans
are prepaid, in addition to collecting a normal fee, a "yield maintenance" fee
is also collected when loans are paid prior to the maturity of their fixed-rate
period.
During the past two years, and in particular the second half of
1998, a stable and then declining interest rate environment prompted many
multi-family and commercial real estate borrowers to exercise their options to
convert their adjustable-rate loans to a fixed-rate basis for several years.
Additionally, many new loans were priced at inception on a fixed-rate basis
generally for periods ranging from two to seven years. If interest rates
increase during the fixed-rate phase of these loans, net interest income
relating to these loans would be negatively affected. Occasionally, the Company
has partially funded loans originated on or converted to a fixed-rate basis by
borrowing funds from the FHLB on a fixed-rate basis for periods that approximate
the fixed-rate terms of the loans.
The Company offers both fixed-rate and adjustable-rate mortgage loans
secured by one-to-four family residences. Fixed-rate residential mortgage loans
are not maintained in the Company's loan portfolio.
10
<PAGE>
The following table sets forth the comparison of the Company's loan
portfolio in dollar amounts and in percentages by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------
1998 1997 1996
----------------------- ---------------------- -----------------------
Percent Percent Percent
Amount of total Amount of total Amount of total
--------- --------- ------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family............. $ 64,467 11.19% $ 68,907 14.25% $ 57,725 13.08%
Multi-family................... 262,678 45.58 219,909 45.50 200,368 45.40
Commercial real estate......... 197,593 34.29 149,540 30.94 139,430 31.60
Construction and development... 17,255 2.99 13,382 2.77 7,261 1.65
Home equity.................... 5,505 .96 5,276 1.09 6,398 1.45
Second......................... 13,944 2.42 15,855 3.28 19,872 4.50
--------- ------ --------- ------- --------- ------
Total mortgage loans......... 561,442 97.43 472,869 97.83 431,054 97.68
Commercial loans................. 13,051 2.26 9,074 1.88 9,221 2.09
Consumer loans................... 1,775 0.31 1,393 0.29 1,023 0.23
--------- ------ --------- ------- --------- ------
Total gross loans, excluding money
market loan participations. 576,268 100.00% 483,336 100.00% 441,298 100.00%
====== ====== ======
Less:
Unadvanced funds on loans...... (26,096) (9,352) (11,950)
Deferred loan origination fees. (1,604) (1,562) (1,326)
Unearned discounts............. (10) (10) (289)
--------- --------- ---------
Total loans, excluding money
market loan participations. 548,558 472,412 427,733
Money market loan participations. 44,300 24,000 52,950
--------- --------- ---------
Total loans, net $ 592,858 $ 496,412 $ 480,683
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1995 1994
----------------------- ----------------------
Percent Percent
Amount of total Amount of total
--------- --------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One-to-four family............. $ 56,814 13.62% $ 57,792 14.62%
Multi-family................... 193,812 46.46 184,537 46.68
Commercial real estate......... 125,363 30.05 114,923 29.07
Construction and development... 10,288 2.47 8,096 2.05
Home equity.................... 7,420 1.78 7,791 1.97
Second......................... 17,680 4.24 17,369 4.40
--------- ----- --------- ------
Total mortgage loans......... 411,377 98.62 390,508 98.79
Commercial loans................. 4,584 1.10 3,062 0.77
Consumer loans................... 1,192 0.28 1,722 0.44
--------- ----- --------- ------
Total gross loans, excluding money
market loan participations. 417,153 100.00% 395,292 100.00%
====== ======
Less:
Unadvanced funds on loans...... (9,879) (8,158)
Deferred loan origination fees. (1,012) (767)
Unearned discounts............. (731) (731)
--------- ---------
Total loans, excluding money
market loan participations. 405,531 385,636
Money market loan participations. 43,100 36,400
--------- ---------
Total loans, net $ 448,631 $ 422,036
========= =========
</TABLE>
11
<PAGE>
Many of the Company's borrowers have done business with the Company
for years and have more than one loan outstanding. It is the Company's current
policy that the aggregate amount of loans outstanding to any one borrower or
related entities may not exceed 8.0% of the Bank's core capital (stockholders'
equity exclusive of unrealized gains or losses on securities available for sale,
net of income taxes) which, at December 31, 1998, amounted to $203.9 million. At
December 31, 1998, the largest borrower had aggregate loans outstanding of $13.7
million, or 6.7% of core capital. Including this borrower, there were 17
borrowers each with aggregate loans outstanding at December 31, 1998 in excess
of $5.0 million, the cumulative total of which was $116.5 million, or 21.2% of
loans outstanding, exclusive of money market loan participations. Most of this
cumulative amount is comprised of multi-family and commercial real estate
mortgage loans.
The following table shows the contractual maturity and repricing dates
of the Company's loan portfolio at December 31, 1998. The table does not include
prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
At December 31, 1998
----------------------------------------------------------------------------------------
Real estate mortgage loans
------------------------------------------------------ Other
Home Money commercial
One-to- Commercial Construction equity and market and
four Multi- real and second loan consumer Total
family family estate development mortgage participations loans loans
-------- -------- -------- ---------- -------- -------------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due(1):
Within one year.................... $ 21,219 $ 66,525 $ 55,450 $ 9,857 $11,407 $44,300 $ 4,703 $ 213,461
-------- -------- -------- ------- ------- ------- ------- ---------
After one year:
More than one year to three years.. 39,297 29,448 21,244 - 1,374 - 1,876 93,239
More than three years to five years 3,755 100,905 63,921 - 658 - 3,285 172,524
More than five years to ten years. 101 55,346 48,167 117 1,509 - 322 105,562
More than ten years............... 95 2,892 6,584 - - - 115 9,686
-------- -------- -------- ------- ------- ------- ------- ---------
Total due after one year......... 43,248 188,591 139,916 117 3,541 - 5,598 381,011
-------- -------- -------- ------- ------- ------- ------- ---------
Total amount due................. $ 64,467 $255,116 $195,366 $ 9,974 $14,948 $44,300 $10,301 594,472
======== ======== ======== ======= ======= ======= =======
Less:
Deferred loan origination fees. (1,604)
Unearned discounts............. (10)
----------
Net loans.................... $ 592,858
=========
</TABLE>
- - ---------------
(1) Amounts due are net of unadvanced funds on loans.
The following table sets forth at December 31, 1998 the dollar amount
of gross loans contractually due or scheduled to reprice after one year and
whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After One Year
--------------------------------
Fixed Adjustable Total
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Real estate mortgage loans:
One-to-four family................................................... $ 507 $ 42,741 $ 43,248
Multi-family......................................................... 77,549 111,042 188,591
Commercial real estate............................................... 79,062 60,854 139,916
Construction and development......................................... 117 - 117
Home equity and second mortgage...................................... 2,091 1,450 3,541
--------- --------- ---------
Total real estate mortgage loans.................................. 159,326 216,087 375,413
Commercial and consumer loans.......................................... 3,097 2,501 5,598
--------- --------- ---------
Total loans....................................................... $ 162,423 $ 218,588 $ 381,011
========= ========= =========
</TABLE>
12
<PAGE>
Non-Performing Assets and Restructured Loans
The following table sets forth information regarding non-performing
assets and restructured loans at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans (1):
Mortgage loans:
One-to-four family................................................ $ - $ 230 $ 428 $ 736 $ 296
Multi-family...................................................... - - 253 - 120
Commercial real estate............................................ 297 522 646 - -
Construction and development...................................... - - 6 6 763
Home equity....................................................... 35 51 - - 98
Commercial loans..................................................... - - - - -
Consumer loans....................................................... - - 4 6 7
-------- ------- ------- ------- ------
Total non-accrual loans........................................... 332 803 1,337 748 1,284
Other real estate owned, net (2)....................................... 1,940 2,373 1,689 1,722 1,805
-------- ------- ------- ------- ------
Total non-performing assets....................................... $ 2,272 $ 3,176 $ 3,026 $2,470 $3,089
======== ======= ======= ======= ======
Restructured loans..................................................... $ - $ 2,287 $ 5,438 $10,922 $5,728
======== ======= ======= ======= ======
Allowance for loan losses as a percent of total loans.................. 2.21% 2.51% 2.56% 2.75% 2.91%
Allowance for loan losses as a percent of total non-performing loans(3) 3,943.98 1552.05 921.91 1,647.86 955.92
Non-performing loans as a percent of total loans....................... 0.01 0.16 0.28 0.17 0.30
Non-performing assets as a percent of total assets..................... 0.26 0.45 0.45 0.39 0.51
</TABLE>
(1) Non-accrual loans include all loans 90 days or more past due and other
loans which have been identified by the Company as presenting uncertainty
with respect to the collectibility of interest or principal.
(2) Other real estate owned balances are shown net of related loss allowances.
(3) Non-performing loans are comprised of non-accrual loans.
Loans are placed on non-accrual status either when reasonable doubt
exists as to the full timely collection of interest and principal or
automatically when a loan becomes past due 90 days.
At December 31, 1998, other real estate owned consisted of two
industrial properties carried at $1.9 million and residential condominium units
carried at $181,000, net of an aggregate valuation allowance of $186,000. For
the years ended December 31, 1998, 1997 and 1996, the Company received income,
net of expenses, of $259,000, $254,000 and $198,000, respectively, from the
rental of the two industrial properties. The Company expects to sell the
properties at prices in excess of their carrying value. Ultimate net sales
proceeds will depend on market conditions in effect at the time of sale. The
condominium units have been sold, but continue to be included in other real
estate owned until cash payments by the purchaser are sufficient to meet the
criteria for recording the transaction as a sale.
Restructured loans represent performing loans for which concessions
(such as reductions of interest rates to below market terms and/or extension of
repayment terms) were granted due to a borrower's financial condition. Based on
satisfactory payment performance, a significant pay-down of loan principal and
payment of interest at market rates, loans previously classified as restructured
were removed from that category in 1998.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for
loan losses based on management's on-going evaluation of the risks inherent in
the Company's loan portfolio. Factors considered in the evaluation process
include growth of the loan portfolio, the risk characteristics of the types of
loans in the portfolio, geographic and
13
<PAGE>
large borrower concentrations, current regional economic and real estate market
conditions that could affect the ability of borrowers to pay, the value of
underlying collateral, and trends in loan delinquencies and charge-offs.
The Company utilizes an internal rating system to monitor and evaluate
the credit risk inherent in its loan portfolio. At the time of loan approval,
all loans other than one-to-four family residential mortgage loans, home equity
loans and consumer loans, are assigned a rating based on all the factors
considered in originating the loan. In the latter part of 1996, the Company
expanded the number of its loan ratings from five to eight. The initial loan
rating is recommended by the loan officer and approved by the individuals or
committee responsible for approving the loan. Loan officers are expected to
recommend to the Loan Committee changes in loan ratings when facts come to their
attention that warrant an upgrade or downgrade in a loan rating. Problem and
potential problem assets are assigned the three highest ratings. Such ratings
coincide with the "Substandard", "Doubtful" and "Loss" classifications used by
federal regulators in their examination of financial institutions. Generally, an
asset is considered Substandard if it is inadequately protected by the current
net worth and paying capacity of the obligors and/or the collateral pledged.
Substandard assets include those characterized by the distinct possibility that
the insured financial institution will sustain some loss if the deficiencies are
not corrected. Assets classified as Doubtful have all the weaknesses inherent in
those classified Substandard with the added characteristic that the weaknesses
present make collection or liquidation in full, on the basis of currently
existing facts, highly questionable and improbable. Assets classified as Loss
are those considered uncollectible and of such little value that their
continuance as assets without the establishment of a specific loss reserve
and/or charge-off is not warranted. Assets which do not currently expose the
insured financial institution to sufficient risk to warrant classification in
one of the aforementioned categories but possess weaknesses are designated
"Special Mention." The Bank assigns its fourth highest rating to loans meeting
this designation.
On a quarterly basis, management reviews with the Watch Committee the
status of each loan assigned one of the Company's four adverse internal ratings,
including the specific and general valuation allowances for losses deemed
prudent. General valuation allowances represent loss allowances established to
recognize the inherent risk associated with lending activities which, unlike
specific allowances, have not been allocated to particular problem loans. Loans,
or portions of loans, classified Loss are either charged-off against valuation
allowances or a specific allowance is established in an amount equal to the
amount classified Loss.
The Company's classification of its loans and the amount of the
valuation allowances it sets aside for estimated losses is subject to review by
the FDIC and the Division. Based on their reviews, these agencies can order the
establishment of additional general or specific loss allowances. The FDIC, in
conjunction with the other federal banking agencies, has adopted an interagency
policy statement on allowances for loan and lease losses. The policy statement
provides guidance for financial institutions on both the responsibilities of
management for the assessment and establishment of adequate allowances and
guidance for banking agency examiners to use in determining the adequacy of a
financial institution's valuation methodology. Generally, the policy statement
recommends that financial institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management analyze
all significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management establish acceptable valuation processes
that meet the objectives set forth in the policy statement. While the Company
believes that it has established an adequate allowance for loan losses, there
can be no assurance that the regulators, in reviewing the Company's loan
portfolio, will not request the Company to materially increase its allowances
for loan losses. Although management believes that adequate specific and general
loan loss allowances have been established, actual losses are dependent upon
future events and, as such, further additions to the level of specific and
general loss allowances could become necessary.
14
<PAGE>
The following table sets forth activity in the Company's allowance for
loan losses for the periods set forth in the table.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $ 12,463 $ 12,326 $ 12,236 $ 12,274 $ 12,745
Provision (credit) for loan losses.......... 300 - - - (477)
Charge-offs:
Mortgage loans:
One-to-four family...................... - - - - 3
Multi-family............................ - - - - 13
Commercial real estate.................. - - 151 237 -
Construction and development............ - - - - -
Home equity............................. - - - - -
Second mortgage......................... - - - - -
Commercial loans.......................... - - - - -
Consumer loans............................ 1 6 15 3 24
Money market loan participations.......... - - - - -
-------- --------- --------- --------- --------
Total charge-offs..................... 1 6 166 240 40
-------- --------- --------- --------- --------
Recoveries:
Mortgage loans:
Multi-family............................ - 25 140 271 31
Commercial real estate.................. 293 8 - 6 5
Construction and development............ - 103 21 - -
Consumer loans............................ 5 7 5 15 10
-------- --------- --------- --------- --------
Total recoveries...................... 332 143 166 292 46
-------- --------- --------- --------- --------
Net recoveries.............................. 331 137 - 52 6
-------- --------- -------- --------- --------
Balance at end of period.................... $ 13,094 $ 12,463 $ 12,326 $ 12,326 $ 12,274
======== ========= ========= ========= ========
</TABLE>
The following tables set forth the Company's percent of allowance by
loan category and the percent of loans to total loans in each of the categories
listed at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ----------------------------- ------------------------------
Percent Percent Percent
of loans of loans of loans
Percent of in each Percent of in each Percent of in each
allowance category allowance category allowance category
to total to gross to total to gross to total to gross
Amount allowance loans Amount allowance loans Amount allowance loans
------- --------- -------- ------ --------- -------- ------ ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family........... $ 226 1.73% 11.19% $ 241 1.93% 14.26% $ 202 1.64% 13.08%
Multi-family.................. 3,610 27.57 45.58 2,993 24.02 45.50 2,725 22.11 45.40
Commercial real estate........ 4,214 32.18 34.29 3,376 27.09 30.94 3,256 26.42 31.60
Construction and development.. 526 4.02 2.99 384 3.08 2.77 463 3.76 1.65
Home equity................... 55 .42 .96 53 .43 1.09 64 0.52 1.45
Second........................ 70 .53 2.42 79 .63 3.28 99 0.80 4.50
Commercial loans................. 379 2.89 2.26 95 .76 1.87 110 0.89 2.09
Consumer loans................... 18 .14 .31 14 .11 .29 10 0.08 0.23
Money market loan participations. - - - - - - - - -
Unallocated...................... 3,996 30.52 - 5,228 41.95 - 5,397 43.78 -
------- ------ ------ ------- ------ ------ ------- ------ ------
Total allowance for loan losses $13,094 100.00% 100.00% $12,463 100.00% 100.00% 12,326 100.00% 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ======
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------
1995 1994
------------------------------------------- --------------------------------------
Percent Percent
of loans of loans
Percent of in each Percent of in each
allowance category allowance category
to total to gross to total to gross
Amount allowance loans Amount allowance loans
-------- ---------- -------- ------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............ $ 199 1.61% 13.62% $ 202 1.65% 14.62%
Multi-family................... 3,177 25.78 46.46 2,956 24.08 46.68
Commercial real estate......... 2,695 21.86 30.05 2,534 20.64 29.07
Construction and development... 504 4.09 2.47 445 3.63 2.05
Home equity.................... 74 0.60 1.78 78 0.63 1.97
Second......................... 133 1.08 4.24 130 1.06 4.39
Commercial loans................. 92 0.75 1.10 61 0.50 0.78
Consumer loans................... 12 0.10 0.28 17 0.14 0.44
Money market loan participations. - - - - - -
Unallocated...................... 5,440 44.13 - 5,851 47.67 -
-------- ------ ------ -------- ------ ------
Total allowance for loan losses $ 12,326 100.00% 100.00% $ 12,274 100.00% 100.00%
======== ====== ====== ======== ====== ======
</TABLE>
The amounts allocated to loan categories in the above table are
determined by consideration of several factors. Specific amounts are allocated
on a loan-by-loan basis for any impairment loss as determined by applying one of
the three methods cited in generally accepted accounting principles. In
addition, general reserves are established based on long-term trends in loan
charge-offs by category and the total of loans according to the Company's
internal ratings.
At December 31, 1998, there were no loans which warranted specific
reserves. Regarding charge-offs, the Company has experienced recoveries at least
equal to or in excess of charge-offs in each of the past five years. The Company
believes this favorable experience is attributable to the robust economy of the
past few years and is not sustainable over normal lending cycles. Accordingly,
the Company has continued to apply charge-off percentages in line with
experience over longer-term lending cycles. Finally, higher general reserves are
applied to loans with ratings above the Company's two best internal ratings.
At December 31, 1998, loans designated as Substandard and Special
Mention totaled $2.3 million and $1.9 million, respectively. No loans were
designated as Doubtful or Loss. The Substandard category included 7 loans, the
two largest of which were $958,000 and $873,000, respectively. The two loans are
secured by office buildings. Loan payments are current and the estimated market
value of the underlying collateral exceeds the loan balances. The Special
Mention category is comprised of a $1.9 million loan secured by an office
building. The loan is adequately secured and payments are current.
During 1998, the allowance for loan losses was increased by $631,000
as a result of net loan recoveries of $331,000 and a provision for loan losses
of $300,000. The Company increased the allowance primarily because of
significant growth of the loan portfolio, substantially all of which pertained
to the higher risk areas of multi-family and commercial real estate mortgage
lending. Total loan growth amounted to $76.1 million exclusive of the increase
in money market loan participations.
For the past several years, a portion of the Company's allowance for
loan losses has been categorized as unallocated rather than being allocated to
specific loan categories. The unallocated part of the allowance has been
maintained in recognition of the inherent risks resulting from the following
concentrations in the Company's portfolio: the significance of loans pertaining
to multi-family apartment buildings and commercial real estate properties, the
geographic location of such properties and the aggregate amount of loans
outstanding to larger borrowers. The combination of these three concentrations
creates a higher than normal degree of risk in the Company's loan portfolio. A
downturn in economic conditions in the Company's primary lending area could have
adverse consequences on the collectibility of the loan portfolio in a relatively
short period of time.
16
<PAGE>
The decline in the unallocated portion of the allowance in 1998 is
attributable to the loan growth mentioned above and the fact that most of the
new loan production did not warrant the two best internal ratings. Such ratings
are typically assigned to only a few new loans and to seasoned loans with
excellent credit performance. The Company has no established range into which
the unallocated portion of the allowance should fall. Instead, the
reasonableness of the unallocated portion is considered based on management's
collective assessment of all the factors cited in the beginning of this section.
Deposits
Historically, deposits have been the Company's primary source of
funds. The Company offers a variety of deposit accounts with a range of interest
rates and terms. The Company's deposit accounts consist of non-interest-bearing
checking accounts and interest-bearing NOW accounts, savings accounts and money
market savings accounts (referred to in the aggregate as "transaction deposit
accounts") and certificate of deposit accounts. The Company offers Individual
Retirement Accounts ("IRAs") and other qualified plan accounts.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and the
relative attractiveness of competing deposit and investment alternatives. During
the past few years, the strength of the stock market has affected deposit flows
as some customers have opted to place their funds in instruments such as mutual
funds rather than in deposit products perceived to have less attractive returns.
The Company's deposits are obtained predominantly from customers in the Town of
Brookline and surrounding communities. The Company relies primarily on
competitive pricing of its deposit products, customer service and long-standing
relationships with customers to attract and retain deposits. Market interest
rates and rates offered by competing financial institutions significantly affect
the Company's ability to attract and retain deposits. The Company uses
traditional means of advertising its deposit products, including transit and
print media, and generally does not solicit deposits from outside its market
area. The Company does not use brokers to obtain deposits.
The following table presents the deposit activity of the Company for
the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Net withdrawals................................ $ (14,132) $ (23,403) $ (13,073)
Interest credited on deposit accounts.......... 21,198 21,691 22,874
---------- ---------- ----------
Total increase (decrease) in deposit accounts.. $ 7,066 $ (1,712) $ 9,801
========== ========== ==========
</TABLE>
17
<PAGE>
The following table sets forth the distribution of the Company's
average deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented. Averages for the periods
presented utilize average daily balances.
<TABLE>
<CAPTION>
Year ended December 31, 1998 Year ended December 31, 1997
------------------------------ --------------------------------
Percent Percent
of total Weighted of total Weighted
Average average average Average average average
balance deposits rate balance deposits rate
-------- -------- -------- ------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts........................................... $ 39,766 8.33% 1.55% $ 37,544 7.79% 1.72%
Savings accounts....................................... 14,510 3.04 2.45 15,063 3.13 2.50
Money market savings accounts.......................... 164,134 34.39 3.87 158,578 32.90 3.85
Non-interest-bearing demand checking accounts.......... 11,908 2.50 - 9,890 2.05 -
--------- ------ --------- -------
Total transaction deposit accounts................. 230,318 48.26 3.18 221,075 45.87 3.22
--------- ------ --------- -------
Certificate of deposit accounts:
Six months or less................................... 63,273 13.26 5.09 67,691 14.05 5.20
Over six months through 12 months.................... 103,478 21.68 5.40 107,490 22.30 5.44
Over 12 months through 24 months..................... 27,369 5.73 5.62 28,196 5.85 5.75
Over 24 months....................................... 52,850 11.07 6.25 57,516 11.93 6.31
--------- ------ --------- -------
Total certificate of deposit accounts.............. 246,970 51.74 5.51 260,893 54.13 5.58
--------- ------ --------- -------
Total average deposits............................. $ 477,288 100.00% 4.39% $ 481,968 100.00% 4.50%
========= ====== ========= ======
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
----------------------------------
Percent
of total Weighted
Average average average
balance deposits rate
--------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
NOW accounts........................................... $ 37,095 7.72% 1.73%
Savings accounts....................................... 17,302 3.60 2.46
Money market savings accounts.......................... 154,541 32.16 3.85
Non-interest-bearing demand checking accounts.......... 9,595 2.00 -
--------- ------
Total transaction deposit accounts................. 218,533 45.48 3.21
--------- ------
Certificate of deposit accounts:
Six months or less................................... 67,402 14.02 5.20
Over six months through 12 months.................... 107,064 22.28 5.60
Over 12 months through 24 months..................... 32,298 6.72 5.84
Over 24 months....................................... 55,243 11.50 6.09
--------- ------
Total certificate of deposit accounts.............. 262,007 54.52 5.63
--------- ------
Total average deposits............................. $ 480,540 100.00% 4.53%
========= ======
</TABLE>
A declining interest rate environment during the past two years has
resulted in some shifting of deposits from certificate of deposit accounts to
more liquid and shorter term transaction deposit accounts and only a modest
amount of deposit growth. The attractiveness of deposits to customers has
diminished as customers have viewed other financial instruments such as mutual
funds, annuities and the stock market as offering greater earnings potential.
While the Company is not anticipating any significant reduction in its deposits,
it has ample liquidity and access to funds to process deposit outflows if such a
trend were to arise.
18
<PAGE>
The following table presents, by various rate categories, the amount
of certificate of deposit accounts outstanding at the dates indicated.
<TABLE>
<CAPTION>
Period to maturity from December 31, 1998
-----------------------------------------------------------------------
Less Three Four
than One to Two to to to At
one two three four five December 31,
year years years years years 1998
--------- -------- -------- ------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate of deposit accounts:
4.01% to 5.00%................... $ 63,088 $ 3,386 $ - $ - $ - $ 66,474
5.01% to 6.00%................... 126,022 17,894 9,676 2,011 3,788 159,391
6.01% to 7.00%................... 3,101 1,137 2,521 3,693 - 10,452
7.01% to 7.50%................... 2,417 9,320 - - - 11,737
--------- -------- -------- ------- ------- ----------
Total............................ $ 194,628 $ 31,737 $ 12,197 $ 5,704 $ 3,788 $ 248,054
========= ======== ======== ======= ======= ==========
</TABLE>
At December 31, 1998, the Company had outstanding $47.8 million in
certificate of deposit accounts of $100,000 or more, maturing as follows:
<TABLE>
<CAPTION>
Weighted
Amount average rate
-------- ------------
(Dollars in thousands)
Maturity Period
- - ---------------
<S> <C> <C>
Three months or less............................ $ 12,564 5.12%
Over three months through six months............ 10,720 5.15
Over six months through twelve months........... 16,140 5.49
Over twelve months.............................. 8,374 6.17
--------
$ 47,798 5.42%
========
</TABLE>
Borrowed Funds
The Company utilizes advances from the FHLB primarily in connection
with its management of the interest rate sensitivity of its assets and
liabilities. The advances are collateralized primarily by certain of the
Company's mortgage loans and secondarily by the Company's investment in the
stock of the FHLB. The maximum amount that the FHLB will advance to member
institutions, including the Company, fluctuates from time to time in accordance
with the policies of the FHLB. At December 31, 1998, the Company had $94.4
million in outstanding advances from the FHLB and had the capacity to increase
that amount to $300.9 million. The Company expects to continue to utilize
borrowings from the FHLB as part of its management of the interest sensitivity
of its assets and liabilities.
The following table sets forth certain information regarding borrowed
funds for the dates indicated:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1998 1997 1996
--------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Advances from the FHLB:
Average balance outstanding................................. $ 78,295 $ 63,771 $ 55,497
Maximum amount outstanding at any month end
during the period........................................ 98,415 69,265 62,665
Balance outstanding at end of period........................ 94,350 69,265 60,565
Weighted average interest rate during the period............ 6.34% 6.52% 6.64%
Weighted average interest rate at end of period............. 6.02% 6.33% 6.49%
</TABLE>
19
<PAGE>
Subsidiary Activities
Brookline Securities Corp. ("BSC") is a wholly-owned subsidiary of the
Company and BBS Investment Corporation ("BBS") is a wholly-owned subsidiary of
the Bank. These companies were established as Massachusetts security
corporations for the purpose of buying, selling and holding investment
securities on their own behalf and not as a broker. The income earned on their
investment securities is subject to a significantly lower rate of state tax than
that assessed on income earned on investment securities maintained at the
Company and the Bank. At December 31, 1998, BSC and BBS had total assets of
$56.8 million and $100.7 million, respectively, $55.9 million and $98.9 million,
respectively, of which were in investment securities and short-term investments.
160 Associates, Inc. ("Associates") is a wholly-owned subsidiary of
the Bank established as a Massachusetts corporation primarily for the purpose of
acquiring and holding stock in a subsidiary engaged in business that qualifies
as a real estate investment trust. The amount of capital Associates invested in
such activity amounted to $265.9 million at December 31, 1998.
Brookline Preferred Capital Corporation ("BPCC") was established in
January 1997 as a Massachusetts corporation to engage in real estate business
activities (including the acquisition and holding of securities and mortgage
loans) that enable it to be taxed as a real estate investment trust for federal
and Massachusetts tax purposes. At December 31, 1998, BPCC had total assets of
$267.2 million, $246.0 million of which were mortgage loans originated by and
acquired from the Bank. BPCC is a 99.9% owned subsidiary of Associates.
Personnel
As of December 31, 1998, the Company had 89 full-time employees and 11
part-time employees. The employees are not represented by a collective
bargaining unit and the Company considers its relationship with its employees to
be good.
Item 2. Properties
The branch located in the Company's main office is owned by the
Company. The other four branches of the Company, its loan production office in
Worcester and its operations center in Brookline are leased from unrelated third
parties. The operations center is used primarily to house operations and support
services. At December 31, 1998, the net book value of premises and leasehold
improvements was $621,000. Refer to Note 13 of the Notes to Consolidated
Financial Statements on page 43 of the Annual Report for information regarding
the Company's lease commitments at December 31, 1998.
Item 3. Legal Proceedings
The Company is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business
which, in the aggregate, involve amounts which are believed by management to be
immaterial to the financial condition and results of operations of the Company.
Item 4. Submission Of Matters To A Vote Of Security Holders
None
20
<PAGE>
PART II
Item 5. Market For The Registrant's Common Stock And Related Security Holder
Matters
The common stock of the Company is traded on the Nasdaq National
Market System. The approximate number of holders of common stock as of December
31, 1998 as well as a table setting forth cash dividends paid on common stock
and the high and low closing prices of the common stock for each of the quarters
in the year ended December 31, 1998 appears on Page 51 of the Company's 1998
Annual Report which is incorporated herein by reference.
Item 6. Selected Consolidated Financial Data
Selected Consolidated Financial Data of the Company appears on pages 1
and 2 of the Company's 1998 Annual Report which is incorporated herein by
reference.
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations appears on pages 6 through 19 of the Company's 1998 Annual
Report which is incorporated herein by reference.
Item 7a. Quantitative And Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk appears on
pages 12 through 14 of the Company's 1998 Annual Report which is incorporated
herein by reference.
Item 8. Financial Statements And Supplementary Data
The following financial statements and supplementary data appear on
the pages indicated of the Company's 1998 Annual Report which is incorporated
herein by reference:
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of Independent Certified Public Accountants 20
Consolidated Balance Sheets as of December 31, 1998 and 1997 21
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996 22
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1998, 1997 and 1996 23
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 24
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 25-26
Notes to Consolidated Financial Statements 27-49
</TABLE>
Item 9. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosures
None.
21
<PAGE>
PART III
Item 10. Directors And Executive Officers Of The Registrant
A listing of and information about the Company's Directors and
Executive Officers appears on pages 4 and 5 of the Company's proxy statement
dated March 15, 1999 which is incorporated herein by reference.
Item 11. Executive Compensation
Executive Compensation is presented on page 9 of the Company's proxy
statement dated March 15, 1999 which is incorporated herein by reference.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
Security Ownership of Certain Beneficial Owners and Management is
presented on pages 2 and 3 of the Company's proxy statement dated March 15, 1999
which is incorporated herein by reference.
Item 13. Certain Relationships And Related Transactions
Certain Relationships and Related Transactions are presented on page
14 of the Company's proxy statement dated March 15, 1999 which is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K
(a) Documents
(1) Financial Statements: All financial statements are included
in Item 8 of Part II of this Report.
(2) Financial Statement Schedules: All financial statement
schedules have been omitted because they are not required,
not applicable or are included in the consolidated
financial statements or related notes.
(3) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
Exhibit Description
- - ------ -----------
3.1 Articles of Organization of the Company. (Exhibit 3.1 to
Registration Statement (No. 333-69245) on Form S-1 filed on
November 18, 1997)**
3.2 Bylaws of the Company (Exhibit 3.2 to Form S-1 filed on November
18, 1997)**
4 Form of Common Stock Certificate of the Company (Exhibit 4 to Form
S-1 filed on November 18, 1997)**
10.1 Form of Employment Agreement (Exhibit 10.1 to Form S-1 filed on
November 18, 1997)**
10.2 Form of Severance Agreement (Exhibit 10.2 to Form S-1 filed on
November 18, 1997)**
22
<PAGE>
10.3 Supplemental Retirement Income Agreement with Richard P. Chapman,
Jr. (Exhibit 10.3 to Form S-1 filed on November 18, 1997)**
10.4 Supplemental Retirement Income Agreement with Susan M. Ginns
(Exhibit 10.4 to Form S-1 filed on November 18, 1997)**
10.5 Supplemental Retirement Income Agreement with Charles H. Peck
(Exhibit 10.5 to Form S-1 filed on November 18, 1997)**
10.6 Amended Employee Stock Ownership Plan
11 Statement Regarding Computation of Per Share Earnings - Earnings
per share is not presented for the period from March 24, 1998 (the
date of Conversion to a stock company) through December 31, 1998
as the earnings per share calculation for that period is not
meaningful.
12 Statement Regarding Computation of Ratios - Such computation can
be clearly determined from the material contained in this Report.
13 1998 Annual Report to Stockholders
21 Subsidiaries of the Registrant - This information is presented in
Item 1. Business - Subsidiary Activities of this Report.
22 Published Report Regarding Matters Submitted to Vote of Security
Holders - the Company's 1999 Stock Option Plan and 1999
Recognition and Retention Plan included in the Company's Proxy
Statement dated March 15, 1999, and incorporated herein by
reference)
27 EDGAR Financial Data Schedule
- - -----------
** Filed as part of a previous Commission filing and incorporated
herein by reference.
(b) Reports on Form 8-K - No reports on Form 8-K were filed by the
Company during the quarter ended December 31, 1998.
</TABLE>
Signatures
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized
BROOKLINE BANCORP, INC.
Date: March 24, 1999 By: /s/ Richard P. Chapman, Jr
---------------------------------------
Richard P. Chapman, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Richard P. Chapman, Jr. By: /s/ Paul R. Bechet
------------------------------------------- ----------------------------------------------
Richard P. Chapman, Jr., President, Chief Paul R. Bechet, Senior Vice President and
Executive Officer and Director Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 24, 1999 Date: March 24, 1999
By: /s/ Oliver F. Ames By: /s/ Hollis W. Plimpton
------------------------------------------- ----------------------------------------------
Oliver F. Ames, Director Hollis W. Plimpton, Director
By: /s/ Dennis S. Aronowitz By:
------------------------------------------- ----------------------------------------------
Dennis S. Aronowitz, Director Edward D. Rowley, Director
By: /s/ George C. Caner, Jr. By: /s/ Joseph J. Slotnik
------------------------------------------- ----------------------------------------------
George C. Caner, Jr., Director Joseph J. Slotnik, Director
By: /s/ David C. Chapin By: /s/ William V. Tripp, III
------------------------------------------- ----------------------------------------------
David C. Chapin, Director William V. Tripp, III, Director
By: /s/ William G. Coughlin By: /s/ Rosamond B. Vaule
------------------------------------------- ----------------------------------------------
William G. Coughlin, Director Rosamond B. Vaule, Director
By: /s/ John L. Hall, II By: /s/ Peter O. Wilde
------------------------------------------- ----------------------------------------------
John L. Hall, II, Director Peter O. Wilde, Director
By: /s/ Charles H. Peck By: /s/ Franklin Wyman, Jr.
------------------------------------------- ----------------------------------------------
Charles H. Peck, Director Franklin Wyman, Jr., Director
</TABLE>
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report. Prior to March 24, 1998, the Company had no
significant assets, liabilities or operations, and accordingly, the data prior
to such time represents the financial condition and results of operations of the
Bank.
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996 1995 1994
---------- ----------- ----------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets............................................ $ 879,027 $ 701,119 $ 666,988 $ 632,788 $ 607,737
Loans, excluding money market loan participations....... 548,558 472,412 427,733 405,531 385,636
Money market loan participations........................ 44,300 24,000 52,950 43,100 36,400
Allowance for loan losses............................... 13,094 12,463 12,326 12,326 12,274
Debt securities:
Available for sale.................................... 102,934 89,620 97,007 62,691 31,585
Held to maturity...................................... 121,390 65,444 41,620 89,342 125,126
Marketable equity securities............................ 30,595 28,017 20,365 19,074 13,301
Deposits................................................ 489,370 482,304 484,016 474,215 471,811
Borrowed funds.......................................... 94,350 69,265 60,565 49,665 43,265
Stockholders' equity.................................... 278,222 132,757 113,947 100,583 85,722
Net unrealized gain on securities available for sale, net of
taxes, included in stockholders' equity............... 14,416 13,739 8,660 7,233 4,100
Non-performing loans.................................... 332 803 1,337 748 1,284
Non-performing assets................................... 2,272 3,176 3,026 2,470 3,089
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996 1995 1994
---------- ----------- ----------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income......................................... $ 61,419 $ 54,125 $ 51,019 $ 48,920 $ 39,943
Interest expense........................................ 26,160 25,858 25,458 23,938 17,761
--------- --------- --------- --------- ---------
Net interest income................................... 35,259 28,267 25,561 24,982 22,182
Provision (credit) for loan losses...................... 300 -- -- -- (477)
--------- --------- --------- --------- ---------
Net interest income after provision
(credit) for loan losses............................ 34,959 28,267 25,561 24,982 22,659
Gains on sales of securities, net....................... 2,843 74 464 877 4
Other real estate owned income (expense), net........... 251 238 299 (40) (741)
Other non-interest income............................... 1,111 853 1,077 768 816
Non-interest expense.................................... (9,181) (8,374) (7,713) (7,450) (7,696)
--------- --------- --------- --------- ---------
Income before income taxes............................ 29,983 21,058 19,688 19,137 15,042
Provision for income taxes.............................. 10,831 7,327 7,751 7,409 5,942
--------- --------- --------- --------- ---------
Net income............................................ $ 19,152 $ 13,731 $ 11,937 $ 11,728 $ 9,100
========= ========= ========= ========= =========
</TABLE>
<PAGE>
SELECTED FINANCIAL RATIOS AND OTHER DATA OF THE COMPANY
<TABLE>
<CAPTION>
At or for the year ended December 31,
1998 1997 1996 1995 1994
---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets................................ 2.33% 2.02% 1.84% 1.91% 1.59%
Return on average stockholders' equity (1).............. 8.36 12.21 11.95 13.42 11.89
Interest rate spread (2)................................ 2.76 3.08 3.10 3.37 3.40
Net interest margin (2)................................. 4.28 4.09 4.00 4.15 3.96
Efficiency ratio (3).................................... 25.07 28.45 28.15 28.02 34.57
Capital Ratios:
Stockholders' equity to total assets at end of year..... 31.65 18.94 17.08 15.89 14.11
Tier 1 leverage capital ratio at end of year (Bank only) 25.86 17.82 15.86 14.96 13.63
Asset Quality Ratios:
Non-performing assets as % of total assets at end of year 0.26 0.45 0.45 0.39 0.51
Allowance for loan losses as % of loans, excluding
money market loan participations, at end of year...... 2.39 2.64 2.88 3.04 3.18
Allowance for loan losses as % of total
non-performing loans at end of year................... 3,943.98 1,552.05 921.91 1,647.86 955.92
Per Share Data:
Basic earnings per common share......................... NM -- -- -- --
Diluted earnings per common share....................... NM -- -- -- --
Number of shares outstanding at
end of period (in thousands) (4)................... 28,595 -- -- -- --
Dividends per common share (5).......................... $ 0.10 -- -- -- --
Book value per common share at end of period ........... $ 9.73 -- -- -- --
Market value per common share at end of period ......... $ 11.50 -- -- -- --
</TABLE>
- - --------------------
(1) Excludes effect of unrealized gains on securities available for sale, net of
taxes.
(2) Calculated on a fully-taxable equivalent basis.
(3) Represents the ratio of non-interest expenses divided by the sum of net
interest income and non-interest income exclusive of gains of sales of
securities.
(4) Common stock issued less treasury stock and unallocated common stock held by
ESOP.
(5) Two quarterly dividends of $ 0.05 each were paid in 1998.
NM - Not Meaningful. Earnings per share is not presented for the period from
March 24, 1998 (the date of conversion to stock-ownership) through December 31,
1998 as the earnings per share calculation for that period is not meaningful.
Earnings per share is not presented for the periods prior to the conversion to
stock form since the Bank was a mutual savings bank and no stock was
outstanding.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reorganization and Stock Offering
Brookline Bancorp, Inc. (the "Company") was organized in November 1997 for the
purpose of becoming the sole stockholder of Brookline Savings Bank (the "Bank")
upon completion of the reorganization of the Bank from a mutual savings bank
into a mutual holding company structure. As part of the reorganization, the
Company offered for sale 47% of the shares of its common stock in an offering
fully subscribed for by eligible depositors of the Bank (the "Offering"). The
remaining 53% of the Company's shares of common stock were issued to Brookline
Bancorp, MHC (the "MHC"), a state-chartered mutual holding company incorporated
in Massachusetts. The reorganization and Offering were completed on March 24,
1998. Prior to that date, the Company had no assets and liabilities. The
reorganization has been accounted for as an "as if" pooling with assets and
liabilities recorded at historical cost.
Completion of the Offering resulted in the issuance of 29,095,000 shares of
common stock, 15,420,350 shares (53%) of which were issued to the MHC and
13,674,650 shares (47%) of which were sold to eligible depositors of the Bank at
$10.00 per share. Proceeds from the Offering, net of $2.0 million of expenses
related to the Offering, amounted to $134.8 million. The Company contributed 50%
of the net proceeds of the Offering to the Bank for general corporate use. Net
proceeds retained by the Company have been used primarily to fund a loan to the
Bank's employee stock ownership plan, repurchase Company shares in the open
market and invest in interest-bearing debt obligations.
General
The Company's activities consist principally of investment activities and the
holding of the Bank's stock. The Company's business operations are conducted
primarily through the Bank. As a result, references to the Company in the
following discussion generally refer to the consolidated operations of the
Company and the Bank.
The Company's primary business is attracting retail deposits from the general
public through its five full-service banking offices and investing those
deposits and other borrowed funds primarily in real estate mortgage loans and
various debt and equity securities. The Company also operates a loan production
office in Worcester, Massachusetts that was opened in mid-1998. The Company
emphasizes the origination of multi-family and commercial real estate mortgage
loans. The Company's consolidated net income depends largely upon net interest
income, which is the difference between interest income from loans and
investments ("interest-earning assets") and interest expense on deposits and
borrowed funds ("interest-bearing liabilities"). Net interest income is
significantly affected by general economic conditions, policies established by
the Federal Reserve Board and competition.
The following discussion contains forward-looking statements based on
management's current expectations regarding economic, competitive, legislative
and regulatory issues that may impact the Company's earnings in future periods.
Any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limitation, the words
"believes", "anticipates", "plans", "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those contemplated by such forward-looking statements. These important factors
include, without limitation, the Company's ability to originate quality loans,
fluctuation of interest rates, real estate market conditions in the Company's
lending areas, general and local economic conditions, competition, the Company's
continued ability to attract and retain deposits, the Company's ability to
control costs, new accounting pronouncements and changing regulatory
requirements.
The discussion and analysis that follows focuses on the factors affecting the
Company's consolidated financial condition at December 31, 1998 and 1997 and
consolidated results of operations during 1998, 1997 and 1996. The consolidated
financial statements and related notes appearing elsewhere in this annual report
should be read in conjunction with this review.
<PAGE>
Overview
The reorganization and stock offering completed on March 24, 1998 significantly
affected the Company's consolidated financial statements. As of that date,
$134.8 million of net proceeds from the sale of stock was added to the Company's
equity. The reinvestment of those funds through December 31, 1998 contributed
significantly to the increase in net income in 1998 over 1997 net income.
Earnings per share is not presented from March 24, 1998 through December 31,
1998 as the earnings per share calculation for that period is not meaningful.
Earnings per share is not presented for the periods prior to the conversion to
stock form since the Bank was a mutual savings bank and no stock was
outstanding.
Financial Condition
Total assets increased by $177.9 million, or 25.4%, from $701.1 million at
December 31, 1997 to $879.0 million at December 31, 1998. Asset growth was
funded primarily from the net proceeds of the Offering completed on March 24,
1998 ($134.8 million), operating earnings, additional funds borrowed from the
Federal Home Loan Bank of Boston ("FHLB") and a modest increase in deposits.
Initially, the net proceeds of the Offering were used primarily to acquire
short-term investments (including money market loan participations) and debt
obligations generally maturing in two years or less. Subsequently, the net
proceeds were also used to fund part of the loan growth and purchase the
Company's stock for the Bank's employee stock ownership plan ("ESOP") and
buy-back program.
Securities available for sale and securities held to maturity amounted to $254.9
million, or 29.0%, of total assets at December 31, 1998 and $183.1 million, or
26.1%, of total assets at December 31, 1997. These investments were primarily in
U.S. Government and Agency obligations (1998: $92.8 million; 1997: $82.3
million) and corporate obligations (1998: $125.2 million; 1997: $71.5 million).
Most of these debt obligations mature within two years. In the second half of
1998, the Company increased its investment in corporate obligations as the yield
on such investments widened in comparison to yields on U.S. Government
obligations. The Company also purchased a modest amount ($6.0 million) of
collateralized mortgage obligations with average maturities of about three years
for yield enhancement. Securities available for sale also include marketable
equity securities valued at $30.6 million at December 31, 1998 and $28.0 million
at December 31, 1997. These amounts include net unrealized gains of $22.7
million and $21.9 million at those respective dates. The portfolio is comprised
primarily of the stock of national and regional money center banks, Freddie Mac
and utility companies.
Money market loan participations amounted to $44.3 million at December 31, 1998
and $24.0 million at December 31, 1997. The participations represent purchases
of a portion of loans to national companies and organizations originated and
serviced by money center banks. The participations generally mature between one
day and three months. The Company views such participations as an alternative
investment to slightly lower yielding short-term investments.
Excluding money market loan participations, the loan portfolio increased by
$76.1 million, or 16.1%, from $472.4 million at December 31, 1997 to $548.5
million at December 31, 1998. Of this increase, $53.8 million took place in the
second half of 1998 as borrowers took advantage of a declining interest rate
environment to refinance existing debt and increase their real estate
borrowings. The loan growth (net of unadvanced funds) was primarily in the
commercial real estate and multi-family mortgage loan segments of the portfolio.
Commercial real estate mortgage loans increased $41.8 million to $190.3 million
and multi-family mortgage loans increased $35.2 million to $250.6 million.
One-to- four family mortgage loans declined by $4.6 million to $64.5 million.
Total deposits increased by $7.1 million, or 1.5%, from $482.3 million at
December 31, 1997 to $489.4 million at December 31, 1998. It is estimated that
deposits declined approximately $11 million in connection with the stock
offering as some of the eligible depositors paid for their stock purchases by
withdrawing funds from deposit accounts. The strength of the stock market and
the low interest rate environment of the past two years has attracted some
<PAGE>
depositors to place funds in other financial instruments such as mutual funds
and annuities.
The Company increased its borrowings from the FHLB from $69.3 million at
December 31, 1997 to $94.4 million at December 31, 1998 as part of its efforts
to manage interest rate risk. As loan customers have sought to lock in fixed
rates for several years, the Company has extended its use of borrowings with
maturities in the five year range.
The increase in stockholders' equity from $132.8 million at December 31, 1997 to
$278.2 million at December 31, 1998 resulted primarily from the receipt of
$134.8 million in net proceeds from the stock offering and net income of $19.2
million less funds used to pay two quarterly dividends of $0.05 each per share
($2.9 million) and purchase Company shares. On March 24, 1998, the Board of
Directors approved an ESOP and authorized it to purchase up to 4% of the common
stock sold in the stock offering, or 546,986 shares. As of December 31, 1998,
407,600 shares had been purchased in the open market at an aggregate cost of
$5.2 million, or $12.88 per share. For the period ended December 31, 1998,
21,143 shares were committed to be released to employees. On October 20, 1998,
the Company received regulatory approval to acquire 1,454,750 shares, or 5% of
total common shares outstanding. The Board of Directors delegated to the
discretion of the Company's senior management the authority to determine the
timing of the repurchases and the prices at which repurchases will be made. No
time limit was established for completion of the program. As of December 31,
1998, the Company purchased 113,500 shares at an aggregate cost of $1.3 million,
or $11.59 per share.
Unrealized gains on securities available for sale are reported as accumulated
other comprehensive income. Such gains amounted to $23.2 million ($14.4 million
on an after-tax basis) at December 31, 1998 and $22.0 million ($13.7 million on
an after-tax basis) at December 31, 1997. The net increase is after realization
of $2.8 million ($1.7 million on an after-tax basis) of gains from sales of
marketable equity securities during 1998.
Non-Performing Assets, Restructured Loans and Allowance for Loan Losses
The following table sets forth information regarding non-performing assets,
restructured loans and the allowance for loan losses:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Non-accrual loans:
Mortgage loans:
Commercial $ 297 $ 522
One-to-four family -- 230
Home equity 35 51
---------- ----------
Total non-accrual loans 332 803
Other real estate owned, net of allowance
for losses of $186 and $186, respectively 1,940 2,373
---------- ----------
Total non-performing assets $ 2,272 $ 3,176
========== ==========
Restructured loans $ -- $ 2,287
========== ==========
Allowance for loan losses $ 13,094 $ 12,463
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Allowance for loan losses as a percent
of total loans 2.21% 2.51%
Allowance for loan losses as a percent
of total loans, excluding money market
loan participations 2.39 2.64
Non-accrual loans as a percent of total loans 0.01 0.16
Non-performing assets as a percent of
total assets 0.26 0.45
</TABLE>
In addition to identifying non-performing loans, the Company identifies loans
that are characterized as "impaired" pursuant to generally accepted accounting
principles. The definition of "impaired loans" is not the same as the definition
of "non-accrual loans," although the two categories tend to overlap. Impaired
loans amounted to $1.4 million at December 31, 1998 and $2.2 million at December
31, 1997. None of the impaired loans at these dates required a specific
allowance for impairment due primarily to prior charge-offs and/or the
sufficiency of collateral values.
During 1998 and 1997, the Company charged off loans amounting to $1,000 and
$6,000, respectively, and recovered $332,000 and $143,000, respectively, of
loans charged off in prior years. Despite the low level of non-performing loans,
the Company increased its allowance for loan losses by the amount of net loan
recoveries and a provision of $300,000 charged to earnings in 1998 (none in
1997). Management deemed it prudent to increase the allowance in 1998 in light
of the $76.1 million increase in net loans outstanding (exclusive of money
market loan participations), most of which occurred in the higher risk
categories of commercial real estate and multi-family mortgage loans.
While management believes that, based on information currently available, the
allowance for loan losses is sufficient to cover losses inherent in the
Company's loan portfolio at this time, no assurance can be given that the level
of the allowance will be sufficient to cover future loan losses or that future
adjustments to the allowance will not be necessary if economic and/or other
conditions differ substantially from the economic and other conditions
considered by management in evaluating the adequacy of the current level of the
allowance.
<PAGE>
Average Balance Sheets and Interest Rates
The following table sets forth certain information relating to the Bank for the
years ended December 31, 1998, 1997 and 1996. The average yields and costs are
derived by dividing interest income or interest expense by the average balance
of interest-earning assets or interest-bearing liabilities, respectively, for
the years shown. Average balances are derived from average daily balances. The
yields and costs include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
------------------------------------ ------------------------------------
Average Average
Average yield/ Average yield/
balance Interest(1) Cost balance Interest(1) Cost
---------- ----------- ------- ----------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments................ $ 38,585 $ 2,104 5.45% $ 9,657 $ 522 5.41%
Debt securities (2)................... 204,489 12,109 5.92 147,282 8,873 6.02
Equity securities (2)................. 33,196 1,221 3.68 26,255 1,196 4.56
Mortgage loans (3)(4)................. 493,737 42,743 8.66 441,625 39,648 8.98
Money market loan participations...... 39,520 2,239 5.67 43,631 2,491 5.71
Other commercial loans (3)............ 7,495 647 8.63 6,201 625 10.08
Consumer loans (3).................... 1,680 167 9.94 1,176 122 10.37
---------- -------- ----------- --------
Total interest-earning assets...... 818,702 61,230 7.48 675,827 53,477 7.91
-------- ------ -------- -------
Allowance for loan losses................ (12,613) (12,428)
Non-interest earning assets.............. 17,519 15,419
---------- -----------
Total assets....................... $ 823,608 $ 678,818
========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
NOW accounts....................... $ 39,766 617 1.55% $ 37,544 645 1.72%
Savings accounts (5)............... 14,510 356 2.45 15,063 377 2.50
Money market savings accounts...... 164,134 6,350 3.87 158,578 6,109 3.85
Certificate of deposit accounts.... 246,970 13,601 5.51 260,893 14,569 5.58
---------- -------- ----------- --------
Total deposits.................. 465,380 20,924 4.50 472,078 21,700 4.60
Borrowed funds........................ 78,295 4,961 6.34 63,771 4,158 6.52
---------- -------- ----------- --------
Total deposits and borrowed funds 543,675 25,885 4.76 535,849 25,858 4.83
Stock offering proceeds 11,000 275 2.50 -- -- --
---------- -------- ----------- --------
Total interest-bearing liabilities 554,675 26,160 4.72 535,849 25,858 4.83
-------- ------ -------- -------
Non-interest-bearing demand
checking accounts.................... 11,908 9,890
Other liabilities........................ 14,075 10,343
---------- -----------
Total liabilities............... 580,658 556,082
Stockholders' equity..................... 242,950 122,736
---------- -----------
Total liabilities and
stockholders' equity........ $ 823,608 $ 678,818
========== ===========
Net interest income (tax equivalent
basis)/interest rate spread (6)....... 35,070 2.76% 27,619 3.08%
===== =====
Less adjustment of tax exempt income..... 255 260
-------- --------
Net interest income (4).................. $ 34,815 $ 27,359
======== ========
Net interest margin (7).................. 4.28% 4.09%
===== =====
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------
Average
Average yield/
balance Interest(1) Cost
---------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments................ $ 14,562 $ 765 5.25%
Debt securities (2)................... 135,039 8,115 6.01
Equity securities (2)................. 21,746 1,142 5.25
Mortgage loans (3)(4)................. 415,054 37,765 9.10
Money market loan participations...... 54,076 3,007 5.56
Other commercial loans (3)............ 3,792 345 9.10
Consumer loans (3).................... 1,098 134 12.20
---------- --------
Total interest-earning assets...... 645,367 51,273 7.94
-------- -----
Allowance for loan losses................ (12,319)
Non-interest earning assets.............. 15,863
----------
Total assets....................... $ 648,911
==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
NOW accounts....................... $ 37,095 641 1.73%
Savings accounts (5)............... 17,302 426 2.46
Money market savings accounts...... 154,541 5,957 3.85
Certificate of deposit accounts.... 262,007 14,751 5.63
---------- --------
Total deposits.................. 470,945 21,775 4.62
Borrowed funds........................ 55,497 3,683 6.64
---------- --------
Total deposits and borrowed funds 526,442 25,458 4.84
Stock offering proceeds -- -- --
---------- --------
Total interest-bearing liabilities 526,442 25,458 4.84
-------- -----
Non-interest-bearing demand
checking accounts.................... 9,595
Other liabilities........................ 5,808
----------
Total liabilities............... 541,845
Stockholders' equity..................... 107,066
----------
Total liabilities and
stockholders' equity........ $ 648,911
==========
Net interest income (tax equivalent
basis)/interest rate spread (6)....... 25,815 3.10%
=====
Less adjustment of tax exempt income..... 254
--------
Net interest income (4).................. $ 25,561
========
Net interest margin (7).................. 4.00%
=====
</TABLE>
- - --------------------
(1) Tax exempt income on equity securities is included on a tax equivalent
basis.
(2) Average balances include unrealized gains on securities available for sale.
Equity securities include marketable equity securities (preferred and
common stocks) and restricted equity securities.
(3) Loans on non-accrual status are included in the average balance.
(4) Excluded from interest income for the years ended December 31, 1998 and
1997 is $444 and $908, respectively, collected from borrowers whose loans
were on non-accrual and which relates to interest earned in periods prior
to January 1, 1998 and 1997, respectively.
(5) Savings accounts include interest-bearing mortgagors' escrow accounts.
(6) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(7) Net interest margin represents net interest income (tax equivalent basis)
divided by average interest-earning assets.
<PAGE>
Interest Rate Spread. Interest rate spread (the difference between yields
earned on interest-earning assets and rates paid on interest-bearing
liabilities) declined from 3.10% in 1996 to 3.08% in 1997 and 2.76% in 1998. The
more significant reduction in 1998 resulted from the mix of interest-earnings
assets and a falling interest rate environment. Because of the impracticality of
rapidly using the Offering proceeds to originate loans, a larger percent of
earning assets were placed in short-term investments and other debt obligations
in 1998 compared to 1997. A lower interest rate and flat yield curve environment
in 1998 resulted in reduced yields on investment purchases, on new loan
originations and on existing loans that were refinanced by borrowers seeking to
reduce their carrying costs.
Net Interest Margin. Net interest margin, which represents net interest
income (on a tax equivalent basis), divided by interest-earning assets,
increased from 4.00% in 1996 to 4.09% in 1997 and 4.28% in 1998. Despite reduced
interest rate spreads, net interest margin climbed higher in 1997 and 1998 as a
result of a greater percent of interest-earnings assets being funded by
cost-free stockholders' equity (16.6% in 1996 compared to 18.2% in 1997 and
29.7% in 1998). Investment of the Offering proceeds caused much of the 1998
increase. Despite this favorable trend, net interest margin (on an annualized
basis) declined to 4.26% in the fourth quarter of 1998 from 4.38% in the third
quarter and 4.39% in the second quarter of 1998. The lower interest rate and
flat yield curve environment referred to in the preceding paragraph caused most
of the decline. Continuation of such an environment in 1999 will likely result
in further reduction of the Company's net interest margin.
Rate/Volume Analysis
The following table presents, on a tax equivalent basis, the extent to which
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected the Bank's interest income and
interest expense during the years indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1998 December 31, 1997
compared to compared to
year ended year ended
December 31, 1997 December 31, 1996
-------------------------------- -----------------------------------
Increase (decrease) Increase (decrease)
due to due to
-------------------------------- -----------------------------------
Volume Rate Net Volume Rate Net
--------- -------- -------- -------- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Short-term investments................ $ 1,577 $ 5 $ 1,582 $ (265) $ 22 $ (243)
Debt securities....................... 3,390 (154) 3,236 738 20 758
Equity securities..................... 281 (256) 25 218 (164) 54
Mortgage loans........................ 4,550 (1,455) 3,095 2,391 (508) 1,883
Money market loan participations...... (233) (19) (252) (594) 78 (516)
Other commercial loans................ 119 (97) 22 239 41 280
Consumer loans........................ 50 (5) 45 9 (21) (12)
------- -------- -------- -------- -------- ------
Total interest income.............. 9,734 (1,981) 7,753 2,736 (532) 2,204
------- -------- -------- -------- -------- ------
Interest expense:
Deposits:
NOW accounts....................... 37 (65) (28) 8 (4) 4
Savings accounts................... (14) (7) (21) (56) 7 (49)
Money market savings accounts...... 215 26 241 156 (4) 152
Certificate of deposit accounts.... (769) (199) (968) (63) (119) (182)
------- -------- -------- -------- -------- ------
Total deposits.................. (531) (245) (776) 45 (120) (75)
Borrowed funds........................ 923 (120) 803 541 (66) 475
Stock offering proceeds............... 275 -- 275 -- -- --
------- -------- -------- -------- -------- ------
Total interest expense.......... 667 (365) 302 586 (186) 400
------- -------- -------- -------- -------- ------
Net change in net interest income........ $ 9,067 $ (1,616) $ 7,451 $ 2,150 $ (346) $1,804
======= ======== ======== ======== ======== ======
</TABLE>
<PAGE>
Quantitative and Qualitative Disclosure About Market Risk
Market risk is the risk of loss from adverse changes in market prices and/or
interest rates. Since net interest income (the differential or spread between
the interest earned on loans and investments and the interest paid on deposits
and borrowings) is the Company's primary source of revenue, interest rate risk
is the most significant non-credit related market risk to which to Company is
exposed. Net interest income is affected by changes in interest rates as well as
fluctuations in the level and duration of the Company's assets and liabilities.
Interest rate risk is the exposure of the Company's net interest income to
adverse movements in interest rates. In addition to directly impacting net
interest income, changes in interest rates can also affect the amount of new
loan originations, the ability of borrowers to repay variable rate loans, the
volume of loan prepayments and refinancings, the carrying value of investment
securities classified as available for sale and the flow and mix of deposits.
The Company's Asset/Liability Committee, comprised of several members of senior
management, is responsible for managing interest rate risk in accordance with
policies approved by the Board of Directors regarding acceptable levels of
interest rate risk, liquidity and capital. The Committee reviews with the Board
of Directors on a quarterly basis its activities and strategies, the effect of
those strategies on the Company's operating results, the Company's interest rate
risk position and the effect subsequent changes in interest rates could have on
the Company's future net interest income. The Committee is actively involved in
the planning and budgeting process as well as in the setting of pricing for the
Company's loan and deposit products.
The Committee manages interest rate risk through use of both earnings simulation
and GAP analysis. Earnings simulation is based on actual cash flows and
assumptions of management about future changes in interest rates and levels of
activity (loan originations, loan prepayments and deposit flows). The
assumptions are inherently uncertain and, therefore, actual results will differ
from simulated results due to timing, magnitude and frequency of interest rate
changes as well as changes in market conditions and strategies. The net interest
income projection resulting from use of actual cash flows and management's
assumptions ("Base Case") is compared to net interest income projections based
on an immediate shift of 200 basis points upward or downward in the first year
of the model ("Interest Rate Shock"). The following table indicates the
estimated impact on net interest income over a one year period under scenarios
of a 200 basis point change upward or downward as a percentage of Base Case
earnings projections.
<TABLE>
<CAPTION>
Estimated Percentage Change
Changes in Interest Rates (Basis Points) in Future Net Interest Income
---------------------------------------- ------------------------------
<S> <C> <C>
+200 over one year.............. (3.18)%
Base Case...................... --
-200 over one year.............. (2.81)%
</TABLE>
The Company's interest rate risk policy states that an immediate 200 basis point
change upward or downward should not negatively impact estimated net interest
income over a one year period by more than 15%.
The results shown above are based on the assumption that there are no
significant changes in the Company's operating environment and that interest
rates will decrease modestly and gradually over the next year. Further, in the
case of the 200 basis point downward adjustment, it was assumed that it would
not be possible to reduce the rates paid on certain deposit accounts by 200
basis points. Instead, it was assumed that NOW accounts would be reduced by 50
basis points, savings accounts by 75 basis points and money market savings
accounts by 138 basis points. There can be no assurance that the assumptions
used will be validated in 1999.
GAP analysis measures the difference between the assets and liabilities
repricing or maturing within specific time periods. An asset-sensitive position
indicates that there are more rate-sensitive assets than rate-sensitive
liabilities repricing or maturing within specific time horizons, which would
generally imply a favorable impact on net interest income in periods of rising
interest rates and a negative impact in periods of falling rates. A
liability-sensitive position would generally imply a negative impact on net
interest income in periods of rising rates and a positive impact in periods of
falling rates. GAP analysis has limitations because it cannot measure the effect
of interest rate movements and competitive pressures on the repricing and
maturity characteristics of interest-earning assets and interest-bearing
liabilities.
<PAGE>
The table below shows the Company's interest rate sensitivity gap position as of
December 31, 1998. NOW accounts, savings accounts and money market savings
accounts are immediately withdrawable and the rates paid on such accounts can be
changed at any time. Accordingly, they are included in the one year or less
period even though management considers it unlikely that such deposits will be
immediately withdrawn.
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------------------------------------------------------
More More More
More More than than than
than one than two three four five
One year to years to years years years
year two three to four to five to ten
or less years years years years years
---------- --------- ---------- --------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Short-term investments........... $ 22,660 $ -- $ -- $ -- $ -- $ --
Weighted average rate........... 4.75%
Debt and equity securities(2).... 99,458 97,836 22,173 6,352 840 397
Weighted average rate........... 5.93% 5.70% 5.65% 6.14% 5.75% 7.22%
Mortgage loans(3)................ 200,065 77,782 54,959 68,463 72,174 61,639
Weighted average rate........... 8.07% 7.86% 7.83% 8.10% 8.13% 7.93%
Money market loan participations 44,300 -- -- -- -- --
Weighted average rate........... 5.53%
Other loans...................... 5,254 686 2,317 1,223 702 119
Weighted average rate........... 8.77% 9.20% 8.71% 8.71% 8.63% 8.77%
--------- --------- ---------- --------- --------- ---------
Total interest-earning assets.... 371,737 176,304 79,449 76,038 73,716 62,155
Weighted average rate........... 7.00% 6.67% 7.25% 7.95% 8.11% 7.93%
--------- --------- ---------- --------- --------- ---------
Interest-bearing liabilities:
NOW accounts..................... 42,950 -- -- -- -- --
Weighted average rate........... 1.50%
Saving Accounts (4).............. 13,144 -- -- -- -- --
Weighted average rate........... 2.50%
Money Market savings accounts.... 173,173 -- -- -- -- --
Weighted average rate........... 3.89%
Certificate of deposit........... 194,628 31,737 12,197 5,705 3,787 --
Weighted average rate........... 5.22% 6.03% 5.77% 6.15% 5.70%
Borrowed funds................... 11,550 9,400 9,350 15,300 30,750 18,000
Weighted average rate........... 6.79% 6.24% 6.66% 6.32% 5.29% 6.06%
--------- --------- ---------- --------- --------- ---------
Total interest-bearing liabilities 435,445 41,137 21,547 21,005 34,537 18,000
Weighted average rate........... 4.28% 6.08% 6.16% 6.27% 5.33% 6.06%
--------- --------- ---------- --------- --------- ---------
Interest sensitivity gap(5)......... (63,708) 135,167 57,902 55,033 39,179 44,155
Impact of interest rate swap........ 5,000 -- -- -- -- (5,000)
Weighted average rate........... 5.34% 5.94%
--------- --------- ---------- --------- --------- ---------
Adjusted interest sensitivity gap... $ (58,708) $ 135,167 $ 57,902 $ 55,033 $ 39,179 $ 39,155
========= ========= ========== ========= ========= =========
Cumulative interest sensitivity gap. $ (58,708) $ 76,459 $ 134,361 $ 189,394 $ 228,573 $ 267,728
========= ========= ========== ========= ========= =========
Cumulative interest sensitivity gap
as a percentage of total assets.. (6.68)% 8.70% 15.29% 21.55% 26.00% 30.46%
Cumulative interest sensitivity
gap as a percentage of total
interest-earning assets.......... (6.95)% 9.05% 15.91% 22.42% 27.06% 31.70%
</TABLE>
<TABLE>
<CAPTION>
More
than
ten years Total
---------- ---------
(Dollars in thousands)
<S> <C> <C>
Interest-earning assets(1):
Short-term investments........... $ -- $ 22,660
Weighted average rate...........
Debt and equity securities(2).... 720 227,776
Weighted average rate........... 8.08%
Mortgage loans(3)................ 4,457 539,539
Weighted average rate........... 8.48%
Money market loan participations -- 44,300
Weighted average rate...........
Other loans...................... -- 10,301
Weighted average rate...........
--------- ---------
Total interest-earning assets.... 5,177 844,576
Weighted average rate........... 8.42%
--------- ---------
Interest-bearing liabilities:
NOW accounts..................... -- 42,950
Weighted average rate...........
Savings accounts (4)............. -- 13,144
Weighted average rate...........
Money Market savings accounts.... -- 173,173
Weighted average rate...........
Certificate of deposit........... -- 248,054
Weighted average rate...........
Borrowed funds................... -- 94,350
Weighted average rate...........
--------- ---------
Total interest-bearing liabilities -- 571,671
Weighted average rate...........
--------- ---------
Interest sensitivity gap(5)......... 5,177 272,905
Impact of interest rate swap........ -- --
Weighted average rate...........
--------- ---------
Adjusted interest sensitivity gap... $ 5,177 $ 272,905
========= =========
Cumulative interest sensitivity gap. $ 272,905
=========
Cumulative interest sensitivity gap
as a percentage of total assets.. 31.05%
Cumulative interest sensitivity
gap as a percentage of total
interest-earning assets.......... 32.31%
</TABLE>
- - -----------------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) Debt and equity securities include all debt securities and $4 million of
auction rate preferred stock, the maturities of which have been assumed to
be the date on which they are next auctioned. All other marketable equity
securities and restricted equity securities are excluded.
(3) For purposes of the gap analysis, the allowance for loan losses, deferred
loan fees, unearned discounts and non-performing loans have been excluded.
(4) Savings accounts include interest-bearing mortgagors' escrow accounts.
(5) Interest sensitivity gap represents the difference between interest-earning
assets and interest-bearing liabilities.
<PAGE>
The Company's cumulative interest sensitivity gap of assets and liabilities with
expected maturities of more than five years grew from approximately $9.7
million, or 1.4% of total assets, at December 31, 1997 to $44.3 million, or 5.0%
of total assets, at December 31, 1998. The increase resulted from having a
significant part of the Company's loan originations and refinancings (notably in
the second half of the year) underwritten at fixed rates for periods of five
years or more. A lower interest rate environment prompted borrowers to seek
fixed rate rather than adjustable rate financing. Competitive market factors
precluded the Company from making adjustable rate loans. While the amount of
added interest rate risk from fixed rate loans originated in 1998 is within
tolerable limits, management recognizes that continuation of fixed rate loan
production increasingly exposes the Company's earnings to changes in the
interest rate environment. Further use of fixed rate borrowings from the FHLB
for extended periods of time and swap agreements will be considered by
management to mitigate interest rate risk if market conditions so warrant.
Other Market Risks. Included in the Company's investment portfolio at
December 31, 1998 are equity securities with a market value of $30.6 million.
Included in that amount are net unrealized gains of $22.7 million. Movements in
the market price of securities may affect the amount of gains or losses
ultimately realized by the Company from the sale of its equity securities.
Comparison of Operating Results For the Years Ended December 31, 1998 and
December 31, 1997
General. Net income for the year ended December 31, 1998 was $19.2 million,
an increase of $5.4 million, or 39.5%, as compared to $13.7 million for the year
ended December 31, 1997. The increase was attributable primarily to higher net
interest income of $7.0 million and $2.8 million more in gains from sales of
securities, partially offset by $3.5 million more in income tax expense,
$300,000 in provision for loan losses and $641,000 in higher compensation and
employee benefits expense. Much of the increase in net interest income resulted
from investment of the $134.8 million of net proceeds from the sale of stock in
March 1998 and growth in the loan portfolio.
Interest Income. Interest income for the year ended December 31, 1998 was
$61.4 million compared to $54.1 million for the year ended December 31, 1997, an
increase of $7.3 million, or 13.5%. A 21.1% growth in average interest-earning
assets from $675.8 million in 1997 to $818.7 million in 1998 contributed $9.7
million of additional interest income. Partially offsetting this amount was a
$2.0 million reduction in interest income resulting from a 43 basis point
decline in the average yield on interest-earning assets from 7.91% in 1997 to
7.48% in 1998. The reduction resulted from the mix of the interest-earning
assets and continuation of a declining interest rate environment. In 1998,
mortgage loans as a percent of total interest-earning assets declined to 60%
compared to 65% in 1997, despite a $52.1 million, or 11.8%, increase in average
mortgage loans outstanding between the two years. The average yield on mortgage
loans declined from 8.98% in 1997 to 8.66% in 1998 as new loans were originated
and borrowers refinanced existing loans at lower rates. Three downward
adjustments of 25 basis points each by the Federal Reserve Board in the fourth
quarter of 1998 reduced interest income from loans tied to a prime rate index by
approximately $125,000. These rate adjustments will cause a reduction in
interest income in 1999 on approximately $82 million of mortgage loans tied to
prime. Average balances of short-term investments and other debt obligations
were $82.0 million, or 40.9%, higher in 1998 than in 1997 as a result of
investment of the net proceeds from the sale of stock. Management will seek to
reduce the percent of assets maintained in these categories by emphasizing
growth of the loan portfolio. Achievement of this objective will depend greatly
on continuation of favorable economic trends.
Interest Expense. Interest expense for the year ended December 31,
1998 was $26.2 million compared to $25.9 million for the year ended December 31,
1997, an increase of $302,000, or 1.2%. Interest paid on deposits (excluding
interest paid in connection with the stock offering) was $776,000, or 3.6% less
in 1998 than in 1997 as a result of a $6.7 million, or 1.4%, decline in the
average balance of deposits and a 10 basis point decline (from 4.60% to 4.50%)
in the average rate paid on deposits. Part of the decline in deposits resulted
from withdrawals by eligible depositors to pay for stock purchased in the stock
offering. The average balance of stock offering proceeds in 1998 on which the
Company paid interest at an annual rate of 2.50% was $11.0 million. The Company
increased
<PAGE>
its average borrowings from the FHLB from $63.8 million in 1997 to $78.3 million
in 1998 as part of its management of interest rate risk resulting from the
origination and refinancing of multi-family and commercial real estate mortgage
loans at fixed rates for certain time intervals. Partially offsetting the added
cost resulting from increased borrowings was a reduction in the average rate
paid on borrowed funds from 6.52% in 1997 to 6.34% in 1998.
Provision for Loan Losses. The Company provided $300,000 for loan losses in
1998 compared to none in 1997. As previously discussed, the provision was made
in light of the significant growth in the higher risk categories of the loan
portfolio.
Non-Interest Income. Non-interest income increased from $1.2 million for
the year ended December 31, 1997 to $4.2 million for the year ended December 31,
1998, primarily as a result of greater gains from sales of marketable equity
securities ($2.8 million in 1998 and $74,000 in 1997). The remainder of
non-interest income is comprised of service fees and charges and net income from
other real estate owned activity. Such sources of income increased by $271,000
in 1998 compared to 1997 primarily as a result of higher loan prepayment and
penalty fees.
Non-Interest Expense. Non-interest expense increased by $807,000, or 9.6%,
from $8.4 million for the year ended December 31, 1997 to $9.2 million for the
year ended December 31, 1998. Of this increase, $641,000 related to compensation
and employee benefits, which rose 12.6% to $5.7 million in 1998. Adoption of an
ESOP resulted in $291,000 of expense in 1998 compared to none in 1997. The
remainder of the increase in compensation and employee benefits was attributable
primarily to the hiring of additional loan officers, a residential mortgage loan
originator and other personnel. Equipment and data processing expense increased
from $1.1 million in 1997 to $1.2 million in 1998 primarily as a result of
$130,000 of expense incurred in 1998 (none in 1997) in connection with the
Company's efforts to address Year 2000 compliance issues. In 1997, data
processing expense was higher as a result of conversion to a new data processing
service bureau computer system. Advertising and marketing expenses increased by
$72,000, or 21.3%, in 1998 compared to 1997 as the Company expanded promotion of
its products and services and incurred higher annual financial report costs.
Other operating expenses remained stable in 1998 in comparison to 1997.
Income Taxes. Total income tax expense for the year ended December 31, 1998
was $10.8 million compared to $7.3 million for the year ended December 31, 1997,
resulting in effective tax rates of 36.1% and 34.8% for the respective years.
The Company paid a lower federal tax rate in 1997 because its taxable earnings
for the tax year ended October 31, 1997 were below the threshold at which the
maximum federal rate had to be applied. The rate of state income taxes was low
in both years because of the utilization of a real estate investment trust
subsidiary and investment security subsidiaries.
Comparison of Operating Results For the Years Ended December 31, 1997 and
December 31, 1996
General. Net income for the year ended December 31, 1997 was $13.7 million,
an increase of $1.8 million, or 15.0%, as compared to $11.9 million for the year
ended December 31, 1996. The increase was attributable to higher net interest
income of $2.7 million and a $424,000 decrease in income tax expense resulting
from a lower effective income tax rate, partially offset by a $661,000 increase
in non-interest expense due to higher operating costs and a $675,000 decline in
non-interest income due in part to $390,000 less in gains from sales of
securities. The increase in net interest income was due primarily to growth in
average interest-earning assets and receipt of $908,000 in interest from a
borrower whose loans were on non-accrual and which related to interest earned in
periods prior to 1997.
Interest Income. Interest income for the year ended December 31,1997 was
$54.1 million compared to $51.0 million for the year ended December 31, 1996, an
increase of $3.1 million, or 6.1%. Excluding the receipt of $908,000 in interest
income referred to in the preceding paragraph, the rate of increase over the
prior year was 4.3%. Subsequent comments on income from lending activities in
1997 exclude the effect of the $908,000. Substantially all of the increase in
interest income resulted from growth in average interest-earning assets of $30.5
million, or 4.7%. The principal areas of growth related to mortgage loans (up
$26.6 million, or 6.4%) and debt
<PAGE>
securities (up $12.2 million, or 9.1%). Most of the mortgage loan growth
resulted from originations of one-to-four family, multi-family and commercial
real estate loans. The increase in debt securities resulted from a decision to
shift some of the Bank's liquid funds placed in short-term investments and money
market loan participations into debt securities so as to improve asset yield.
Interest Expense. Interest expense for the year ended December 31, 1997 was
$25.9 million compared to $25.5 million for the year ended December 31, 1996, an
increase of $400,000, or 1.6%. This increase resulted primarily from a higher
average balance of interest-bearing liabilities ($9.4 million, or 1.8%) as the
average rate paid on such liabilities declined by 1 basis point. Average
interest-bearing deposit balances increased modestly ($1.1 million, or 0.2%) as
a continued low rate environment made it difficult to attract deposits. The Bank
increased its borrowings from the FHLB as part of its management of interest
rate risk resulting from the origination and refinancing of multi-family and
commercial real estate mortgage loans at fixed rates for certain time intervals.
Interest expense on borrowed funds increased $475,000, or 12.9%, for the year
ended December 31, 1997 due to an $8.3 million, or 14.9%, increase in the
average balance of such funds to $63.8 million, which was partially offset by a
12 basis point reduction in the average rate paid on borrowed funds to 6.52% in
1997 compared to 6.64% in1996.
Provision for Loan Losses. The Bank did not provide for loan losses in 1997
and 1996 based on continuation of favorable trends in the various factors
considered by management in evaluating the adequacy of the Bank's allowance for
loan losses. Non-performing loans amounted to $803,000, or 0.16%, of total loans
at December 31, 1997 and $1.3 million, or 0.28%, at December 31, 1996. At those
respective dates, the allowance for loan losses was $12.5 million and $12.3
million, or 2.51% and 2.56% of total loans outstanding.
Non-Interest Income. Non-interest income is comprised of fees and charges
for Bank services, gains or losses from sales of assets, other real estate owned
activity and other income resulting from miscellaneous transactions. Total
non-interest income was $1.2 million for the year ended December 31, 1997
compared to $1.9 million for the year ended December 31, 1996, a decrease of
$675,000, or 36.7%. The decrease resulted primarily from a $165,000 reduction in
Bank fees and services, less gains from sales of marketable equity securities
($74,000 in 1997 compared to $464,000 in 1996) and a $61,000 reduction in income
from other real estate owned activities. The decrease in Bank fees and services
resulted primarily from less fees from loan prepayments and late payments.
Non-Interest Expense. Non-interest expense increased by $661,000, or 8.6%,
from $7.7 million for the year ended December 31, 1996 to $8.4 million for the
year ended December 31, 1997. Of this increase, $568,000 related to compensation
and employee benefits, which rose 12.6% to $5.1 million for the year ended
December 31, 1997. The higher level of compensation and employee benefits was
attributable to several factors: the addition of a chief financial officer and
another commercial loan officer, increased use of temporary personnel from an
outside agency because of personnel turnover, increased accruals for
supplemental executive retirement costs and bonuses, a one-time charge for
compensation-related costs pertaining to the creation of a real estate
investment trust, increased personnel benefit costs and increased personnel
training in connection with conversion to a new computer system.
Occupancy expense increased $74,000, or 11.8 %, to $701,000 for the year
ended December 31, 1997 as a result of branch lease renewals at higher annual
rental charges and the cost of refurbishings at the main office of the Bank.
Equipment and data processing expense increased from $940,000 in 1996 to $1.1
million in 1997 primarily as a result of higher depreciation expense on new
equipment put into use in connection with the Bank's conversion to a data
processing service bureau computer system. Other operating expense categories
did not change significantly between 1997 and 1996 except for an increase of
$60,000 in FDIC deposit insurance premiums and a decrease of $126,000 in
professional fees for legal and advisory services.
Income Taxes. Total income tax expense for the year ended December 31, 1997
was $7.3 million compared to $7.8 million for the year ended December 31, 1996,
resulting in effective tax rates of 34.8% and 39.4% for the respective years.
The lower effective tax rate resulted from creation of a real estate investment
trust and continued utilization of a securities investment subsidiary to
substantially reduce state income taxes. The rate of federal income tax is
slightly less than the statutory rate as a result of the exemption of part of
the Bank's dividend income on equity securities from taxable income.
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and debt securities and borrowings from the FHLB. In March
1998, $134.8 million of net proceeds from the Offering added significantly to
the funds available to the Company for use in conducting its business. While
maturities and scheduled amortization of loans and investments are predictable
sources of funds, deposit flows and mortgage loan prepayments are greatly
influenced by interest rate trends, economic conditions and competition.
During the past few years, the combination of generally low interest rates on
deposit products and the attraction of alternative investments such as mutual
funds and annuities has resulted in little growth or a net decline in deposits
in certain time periods. Based on its monitoring of historic deposit trends and
its current pricing strategy for deposits, management believes the Bank will
retain a large portion of its existing deposit base.
From time to time, the Company utilizes advances from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. During the year ended December 31, 1998, the Company repaid
advances of $24.9 million and obtained new advances of $50.0 million. Total
advances outstanding at December 31, 1998 amounted to $94.4 million.
The Company's most liquid assets are cash and due from banks, short-term
investments, debt securities and money market loan participations that generally
mature within 90 days. At December 31, 1998, such assets amounted to $98.6
million, or 11.2% of total assets.
At December 31,1998, the Company and the Bank exceeded all regulatory capital
requirements. The Bank's Tier I capital was $204.0 million, or 25.9% of adjusted
assets. The minimum required Tier I capital ratio is 4.00%.
Year 2000 ("Y2K") Compliance
Changing from the year 1999 to 2000 has the potential to cause problems in data
processing and other date-sensitive systems, a problem known as the Year 2000 or
Y2K dilemma. The Year 2000 date change can affect any system that uses computer
software programs or computer chips, including automated equipment and
machinery. For example, many software programs or computer chips store calender
dates as two-digit rather than four-digit numbers. These software programs
record the year 1998 as "98." This approach will work until the Year 2000 when
"00" may be read as 1900 instead of 2000.
Regarding the Company, computer systems are used to perform financial
calculations, track deposits and loan payments, transfer funds and make direct
deposits. The processing of the Company's loan and deposit transactions is
outsourced to a third-party data processing vendor. Computer software and
computer chips also are used to run security systems, communications networks
and other essential bank equipment. Because of its reliance on these systems
(including those used by its third-party data processing vendor), the Company is
following a comprehensive process to assure that such systems are ready for the
Year 2000 date change.
To become Y2K compliant, the Company is following a five-step process suggested
by federal bank regulatory agencies. A description of each of the steps and the
status of the Company's efforts in completing the steps is as follows:
Step 1. Awareness and Understanding of the Problem. The Company has formed
a Year 2000 team that has investigated the problem and its potential impact on
the Company's systems. An independent consulting firm has been engaged to assist
the Company in development of its approach to becoming Y2K compliant. This phase
also includes education of the Company's employees and customers about Y2K
issues. The awareness and understanding phase of this step has been completed.
Training and communication has taken place and will continue in 1999.
<PAGE>
Step 2. Identification of All Potentially Affected Systems. This step has
included a review of all major information technology ("IT") and non-information
technology ("non-IT") systems to determine how they are impacted by Y2K issues.
An inventory has been prepared of all vendors who render IT and non-IT services
to the Company. This step is considered complete.
Step 3. Assessment and Planning. The Y2000 team has completed its
assessment of which systems and equipment are most prone to placing the Company
at risk if they are not Y2K compliant. The project team has developed an
inventory of its vendors, an inventory of actions to be taken, identification of
the team members responsible for completion of each action, a completion
timetable and a project tracking methodology. Significant vendors have been
requested to advise the Company in writing of their Y2K readiness, including
actions to become compliant if they are not already compliant. A plan has been
developed to repair or replace systems and equipment not currently Y2K
compliant. This step is substantially completed. Satisfactory responses have
been received from most of the Company's vendors.
Step 4. Correction and Testing. The Company's third party data processing
servicer as well as vendors who provide significant technology-related services
have modified their systems to become Y2K compliant. The Company has developed
scripts involving typical transactions to test the proper functioning of the
modified systems. It has also arranged for repair or replacement of equipment
programs affected by Y2K issues. Most of the testing and corrections has taken
place. This step is substantially completed. The monitoring of certain non-IT
vendors will continue into 1999.
Step 5. Implementation. This step includes repair or replacement of systems
and computer equipment and the development of contingency plans. The repair and
replacement phase is substantially completed. Contingency plans for how the
Company would resume business if unanticipated problems arise from
non-performance by IT and non- IT vendors is in the process of being addressed.
Such plans are expected to be completed in the first quarter of 1999.
* * * * *
The Company's efforts to become Y2K compliant are being monitored by its banking
regulators. Failure to be Y2K compliant could subject the Company to formal
supervisory or enforcement actions.
The Company expensed $130,000 during the year ended December 31, 1998 and
expects to incur a lesser amount of costs in 1999 to become Y2K compliant. The
Company presently believes the Y2K issue will not pose significant operating
problems for the Company. However, if implementation and testing plans are not
completed in a satisfactory and timely manner, in particular by third parties on
which the Company is dependent, or other unforeseen problems arise, the Y2K
issue could have a material adverse effect on the operations of the Company.
New Accounting Pronouncements
See note 1 to the consolidated financial statements for information concerning
new accounting pronouncements. It is not anticipated that such pronouncements
will have a significant impact on the Company's financial position or results of
operations.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Brookline Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of
Brookline Bancorp, Inc. and subsidiaries (the Company) as of December 31, 1998
and 1997, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Brookline Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Boston, Massachusetts
January 19, 1999
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks.................................................. $ 6,657 $ 8,843
Short-term investments................................................... 22,660 11,670
Securities available for sale............................................ 133,529 117,637
Securities held to maturity (market value of $122,043
and $65,600, respectively)............................................ 121,390 65,444
Restricted equity securities............................................. 5,174 3,721
Loans, excluding money market loan participations........................ 548,558 472,412
Money market loan participations......................................... 44,300 24,000
Allowance for loan losses................................................ (13,094) (12,463)
------------ -----------
Net loans.......................................................... 579,764 483,949
------------ -----------
Accrued interest receivable.............................................. 6,457 5,240
Bank premises and equipment, net......................................... 1,184 1,361
Other real estate owned, net............................................. 1,940 2,373
Other assets............................................................. 272 881
------------ -----------
Total assets....................................................... $ 879,027 $ 701,119
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits................................................................. $ 489,370 $ 482,304
Borrowed funds........................................................... 94,350 69,265
Mortgagors' escrow accounts.............................................. 3,308 2,896
Income taxes payable..................................................... 5,843 5,901
Deferred income tax liability, net....................................... 2,045 2,041
Accrued expenses and other liabilities................................... 5,889 5,955
------------ -----------
Total liabilities.................................................. 600,805 568,362
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
none issued........................................................ -- --
Common stock, $.01 par value; 45,000,000 shares authorized,
29,095,000 shares issued........................................... 291 --
Additional paid-in capital............................................ 134,490 --
Retained earnings..................................................... 135,282 119,018
Accumulated other comprehensive income................................ 14,416 13,739
Treasury stock, at cost - 113,500 shares and
none, respectively................................................. (1,316) --
Unallocated common stock held by ESOP - 386,457 shares
and none, respectively............................................. (4,941) --
------------ -----------
Total stockholders' equity...................................... 278,222 132,757
------------ -----------
Total liabilities and stockholders' equity...................... $ 879,027 $ 701,119
============ ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Interest income:
Loans, excluding money market loan participations.............. $ 44,001 $ 41,303 $ 38,245
Money market loan participations............................... 2,239 2,491 3,006
Debt securities................................................ 12,109 8,873 8,115
Marketable equity securities................................... 695 715 697
Restricted equity securities................................... 271 220 191
Short-term investments......................................... 2,104 523 765
---------- ----------- ----------
Total interest income....................................... 61,419 54,125 51,019
---------- ----------- ----------
Interest expense:
Deposits....................................................... 21,199 21,700 21,775
Borrowed funds................................................. 4,961 4,158 3,683
---------- ----------- ----------
Total interest expense ..................................... 26,160 25,858 25,458
---------- ----------- ----------
Net interest income............................................... 35,259 28,267 25,561
Provision for loan losses......................................... 300 -- --
---------- ----------- ----------
Net interest income after provision for loan losses......... 34,959 28,267 25,561
---------- ----------- ----------
Non-interest income:
Fees and charges............................................... 1,095 792 957
Gains on sales of securities, net.............................. 2,843 74 464
Other real estate owned income, net............................ 251 238 299
Other income................................................... 16 61 120
---------- ----------- ----------
Total non-interest income................................... 4,205 1,165 1,840
---------- ----------- ----------
Non-interest expense:
Compensation and employee benefits............................. 5,722 5,081 4,513
Occupancy...................................................... 694 701 627
Equipment and data processing.................................. 1,186 1,116 940
Advertising and marketing...................................... 410 338 319
Deposit insurance premiums..................................... 70 71 11
Other.......................................................... 1,099 1,067 1,303
---------- ----------- ----------
Total non-interest expense.................................. 9,181 8,374 7,713
---------- ----------- ----------
Income before income taxes........................................ 29,983 21,058 19,688
Provision for income taxes........................................ 10,831 7,327 7,751
---------- ----------- ----------
Net income.................................................. $ 19,152 $ 13,731 $ 11,937
========== =========== ==========
Basic and diluted earnings per share.............................. NM -- --
Weighted average common shares outstanding - basic
and diluted................................................. NM -- --
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Net income........................................................... $ 19,152 $ 13,731 $ 11,937
---------- ----------- ----------
Other comprehensive income, net of taxes:
Unrealized holding gains.......................................... 4,007 8,424 2,702
Income tax expense................................................ 1,617 3,297 961
---------- ----------- ----------
Net unrealized holding gains................................... 2,390 5,127 1,741
---------- ----------- ----------
Less reclassification adjustment for gains included in net income:
Realized gains.................................................... 2,843 74 464
Income tax expense................................................ 1,130 26 150
---------- ----------- ----------
Net reclassification adjustment................................ 1,713 48 314
---------- ----------- ----------
Total other comprehensive income............................... 677 5,079 1,427
---------- ----------- ----------
Comprehensive income................................................. $ 19,829 $ 18,810 $ 13,364
========== =========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Additional other
Common paid-in Retained comprehensive Treasury
stock capital earnings income stock
---------- ---------- ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995............ $ -- $ -- $ 93,350 $ 7,233 $ --
Net income.............................. -- -- 11,937 -- --
Unrealized gain on securities
available for sale, net of
reclassification adjustment.......... -- -- -- 1,427 --
---------- ----------- ----------- ---------- ----------
Balance at December 31, 1996............ -- -- 105,287 8,660 --
Net income.............................. -- -- 13,731 -- --
Unrealized gain on securities
available for sale, net of
reclassification adjustment.......... -- -- -- 5,079 --
---------- ----------- ----------- ---------- ----------
Balance at December 31, 1997............ -- -- 119,018 13,739 --
Net income.............................. -- -- 19,152 -- --
Unrealized gain on securities
available for sale, net of
reclassification adjustment.......... -- -- -- 677 --
Net proceeds of stock offering
and issuance of common
stock (29,095,000 shares)............ 291 134,499 -- -- --
Common stock dividend
of $0.10 per share................... -- -- (2,888) -- --
Treasury stock purchases
(113,500 shares)..................... -- -- -- -- (1,316)
Common stock acquired by
ESOP (407,600 shares)................ -- -- -- -- --
Common stock held by ESOP
committed to be released
(21,143 shares)...................... -- (9) -- -- --
---------- ----------- ----------- ---------- ----------
Balance at December 31, 1998............ $291 $134,490 $135,282 $14,416 $(1,316)
========== =========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Unallocated
common
stock Total
held by stockholders'
ESOP equity
--------------- --------------
<S> <C> <C>
Balance at December 31, 1995............ $ -- $100,583
Net income.............................. -- 11,937
Unrealized gain on securities
available for sale, net of
reclassification adjustment.......... -- 1,427
------------ -----------
Balance at December 31, 1996............ -- 113,947
Net income.............................. -- 13,731
Unrealized gain on securities
available for sale, net of
reclassification adjustment.......... -- 5,079
------------ -----------
Balance at December 31, 1997............ -- 132,757
Net income.............................. -- 19,152
Unrealized gain on securities
available for sale, net of
reclassification adjustment.......... -- 677
Net proceeds of stock offering
and issuance of common
stock (29,095,000 shares)............ -- 134,790
Common stock dividend
of $0.10 per share................... -- (2,888)
Treasury stock purchases
(113,500 shares)..................... -- (1,316)
Common stock acquired by
ESOP (407,600 shares)................ (5,248) (5,248)
Common stock held by ESOP
committed to be released
(21,143 shares)...................... 307 298
------------ -----------
Balance at December 31, 1998............ $(4,941) $278,222
============ ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 19,152 $ 13,731 $ 11,937
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses...................................... 300 -- --
Depreciation and amortization.................................. 462 450 261
Amortization, net of accretion, of securities premiums
and discounts............................................... 1,021 633 526
Accretion of deferred loan origination fees
and unearned discounts...................................... (529) (592) (619)
Net gains from sales of securities............................. (2,843) (74) (464)
Net gains from sales of other real estate owned................ (22) (12) (149)
Deferred income taxes.......................................... (482) (302) 21
Release of ESOP shares......................................... 298 -- --
(Increase) decrease in:
Accrued interest receivable................................. (1,217) (134) 487
Other assets................................................ 609 (202) 6
Increase (decrease) in:
Income taxes payable........................................ (58) 4,450 (640)
Accrued expenses and other liabilities...................... (66) 1,671 330
--------- -------- --------
Net cash provided by operating activities................ 16,625 19,619 11,696
--------- -------- --------
Cash flows from investing activities:
Proceeds from sales of securities available for sale................. 3,687 752 2,712
Proceeds from redemptions and maturities of securities
available for sale................................................ 47,858 50,956 25,583
Proceeds from redemptions and maturities of securities
held to maturity.................................................. 21,252 21,693 110,400
Purchase of securities available for sale............................ (63,652) (43,651) (61,316)
Purchase of securities held to maturity.............................. (77,998) (46,049) (63,077)
Purchase of Federal Home Loan Bank of Boston stock................... (1,453) (240) (613)
Net increase in loans................................................ (76,977) (45,883) (28,644)
Proceeds from sales of participations in loans....................... 1,691 1,198 5,965
Purchase of bank premises and equipment.............................. (251) (344) (570)
Capital expenditures on other real estate owned...................... (129) (88) (17)
Proceeds from sales of other real estate owned....................... 550 158 1,284
--------- -------- --------
Net cash used for investing activities...................... (145,422) (61,498) (8,293)
--------- -------- --------
</TABLE>
(Continued)
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Increase in demand deposits and NOW, savings and
money market savings accounts..................................... 15,097 3,982 8,918
Increase (decrease) in certificates of deposit....................... (8,031) (5,694) 883
Proceeds from Federal Home Loan Bank of Boston advances.............. 49,950 25,792 22,796
Repayment of Federal Home Loan Bank of Boston advances............... (24,865) (17,092) (11,896)
Increase in mortgagors' escrow accounts.............................. 412 119 403
Net proceeds from issuance of common stock........................... 134,790 -- --
Purchase of common stock for ESOP.................................... (5,248) -- --
Purchase of treasury stock........................................... (1,316) -- --
Payment of common stock dividends.................................... (2,888) -- --
--------- -------- --------
Net cash provided by financing activities................ 157,901 7,107 21,104
--------- -------- --------
Net increase (decrease) in cash and cash equivalents.................... 29,104 (34,772) 24,507
Cash and cash equivalents at beginning of period........................ 44,513 79,285 54,778
--------- -------- --------
Cash and cash equivalents at end of period.............................. $ 73,617 $ 44,513 $ 79,285
========= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds........................... $ 26,039 $ 25,813 $ 26,491
Income taxes...................................................... 11,363 3,309 8,361
Non-cash activities:
Transfers from loans to other real estate owned................... -- 728 1,096
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies and Related Matters
As part of a reorganization and stock offering completed on March 24, 1998 and
described more fully in note 2, Brookline Bancorp, Inc. (the "Company") was
formed as a Massachusetts corporation and parent of Brookline Savings Bank (the
"Bank").
The Company operates five full service banking offices located in Brookline,
Massachusetts. Its primary activities include acceptance of deposits from the
general public, origination of mortgage loans on residential and commercial real
estate located principally in Massachusetts, and investment in debt and equity
securities. The Company is subject to competition from other financial and
non-financial institutions and is supervised and regulated by the Board of
Governors of the Federal Reserve System. As a Massachusetts chartered savings
bank whose deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") and the Deposit Insurance Fund ("DIF"), the activities of the Bank are
subject to regulation, supervision and examination by the FDIC, the Office of
the Massachusetts Commissioner of Banks and the DIF.
Principles of Consolidation and Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, the Bank and Brookline Securities Corp. ("BSC").
The Bank includes its wholly-owned subsidiaries, 160 Associates, Inc.
("Associates") and BBS Investment Corporation ("BBS"). BSC and BBS are engaged
in buying, selling and holding investment securities. Associates is engaged in
marketing services at immaterial levels of activity. In 1997, Brookline
Preferred Capital Corporation ("BPCC") was established as a 99.9% owned
subsidiary of Associates. BPCC is a real estate investment trust that owns and
manages real estate mortgage loans originated by the Bank. All significant
intercompany transactions and balances are eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, income and expenses.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the allowance for loan losses.
Certain amounts in the prior years' consolidated financial statements were
reclassified to permit comparison with the current year.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include highly liquid
assets with an original maturity of three months or less. Highly liquid assets
include cash and due from banks, short-term investments and money market loan
participations.
Securities
Marketable equity securities and debt securities are classified as either
trading account securities, held to maturity securities (applicable only to debt
securities) or available for sale securities. Management determines the
classification of securities at the time of purchase.
Trading account securities are carried at estimated fair value with unrealized
gains and losses included in earnings. None of the securities purchased by the
Company have been classified as trading account securities.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Debt securities for which the Company has the positive intent and ability to
hold to maturity are classified as held to maturity and carried at amortized
cost. Those securities held for indefinite periods of time and not intended to
be held to maturity are classified as available for sale. Securities held for
indefinite periods of time include securities that management intends to use as
part of its asset/liability management strategy and that may be sold in response
to changes in interest rates or other business factors. Securities available for
sale are carried at estimated fair value. Unrealized gains (losses), net of
related income taxes, are included in the "accumulated other comprehensive
income" component of stockholders' equity. Restricted equity securities are
carried at cost.
Premiums and discounts on debt securities are amortized to expense and accreted
to income over the estimated life of the respective security using a method
which approximates the interest method. Security transactions are recorded on
the trade date. Realized gains and losses are determined using the specific
identification method. Security valuations are reviewed and evaluated
periodically by management. If the decline in the value of any security is
deemed to be other than temporary, the security is written down to a new cost
basis and the resulting loss is charged to income.
Loans
Loans are reported at the principal amount outstanding, reduced by net deferred
loan origination fees, unearned discounts and unadvanced funds due mortgagors on
uncompleted loans.
Loan origination fees and direct loan origination costs are deferred, and the
net fee or cost is recognized in interest income using the interest method.
Deferred amounts are recognized for fixed rate loans over the contractual life
of the loans and for adjustable rate loans over the period of time required to
adjust the contractual interest rate to a yield approximating a market rate at
origination date.
Accrual of interest on loans is discontinued either when reasonable doubt exists
as to the full timely collection of interest and principal or when a loan
becomes past due 90 days. All interest previously accrued and not collected is
reversed against interest income. Interest payments received on non-accrual and
impaired loans are recognized as income unless further collections are doubtful,
in which case the payments are applied as a reduction of principal. Loans are
generally returned to accrual status when principal and interest payments are
current, full collectibility of principal and interest is reasonably assured and
a consistent record of performance (generally six months) has been achieved.
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect principal or interest due
according to the contractual terms of the loan. Impaired loans are measured and
reported based on one of three methods: the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. If the measure is less than an impaired loan's recorded
investment, an impairment loss is recognized as part of the allowance for loan
losses.
Allowance for Loan Losses
The allowance for loan losses is based on a periodic analysis of the loan
portfolio by management of the amount deemed necessary to adequately provide for
losses in the loan portfolio. Factors considered in making the evaluation
include growth of the loan portfolio, the risk characteristics of the types of
loans in the portfolio, geographic and large borrower concentrations, current
regional economic and real estate market conditions that could affect the
ability of borrowers to pay, the value of underlying collateral, and trends in
loan delinquencies and charge-offs. Provisions for losses are charged to income.
Loans are charged off against the allowance when the collectibility of principal
is unlikely. Recoveries of loans previously charged off are credited to the
allowance.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Bank Premises and Equipment
Bank premises and equipment are carried at cost less accumulated depreciation
and amortization, except for land which is carried at cost. Bank premises and
equipment are depreciated using the straight-line method over the estimated
useful life of the assets. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
life of the improvements.
Other Real Estate Owned
Other real estate owned is comprised of properties acquired through foreclosure
or acceptance of a deed in lieu of foreclosure. Such properties are recorded
initially at estimated fair value less costs to sell. When a property is
acquired, the excess of the loan balance over the estimated fair value is
charged to the allowance for loan losses. An allowance for losses on other real
estate owned is established by a charge to income when, upon periodic evaluation
by management, further declines in the estimated fair value of properties have
occurred. Such evaluations are based on an analysis of individual properties as
well as a general assessment of current real estate market conditions.
Holding costs and rental income on properties are included in current operations
while certain costs to improve such properties are capitalized. Gains and losses
from the sale of properties are reflected in operating results when realized.
Pension and Postretirement Benefits
The Company accounts for pension and postretirement benefits on the net periodic
cost method. This method recognizes the compensation cost of employee benefits
over each employee's estimated service life. Pension costs are funded based on
the maximum amount that can be deducted for federal income tax purposes.
Employees' Stock Ownership Plan ("ESOP")
The Company recognizes compensation expense equal to the fair value of ESOP
shares during the period they are committed to be released.
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings Per Common Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the periods
presented. ESOP shares committed to be released are considered outstanding while
unallocated ESOP shares are not considered outstanding. Diluted earnings per
share is the same as basic earnings per share since the Company did not have any
stock option plans in effect as of December 31,
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
1998. The Company expects to submit a stock option plan for the approval of
stockholders at its annual meeting in April 1999.
Earnings per share is not presented for the period from March 24, 1998 (the date
of conversion to a stock company) through December 31, 1998 as the earnings per
share calculation for that period is not meaningful. Earnings per share is not
presented for the periods prior to the conversion to stock form since the Bank
was a mutual savings bank and no stock was outstanding.
New Accounting Pronouncements
Effective January 1, 1997, the Bank adopted Statement of Financial Accounting
Standards (" SFAS") No. 125, "Accounting for Transfers of Financial Assets and
Extinguishment of Liabilities." This Statement is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
December 31, 1996. However, SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS No. 125," requires the deferral of implementation as
it relates to repurchase agreements, dollar-rolls, securities lending and
similar transactions until years beginning after December 31, 1997. Adoption of
SFAS No. 125 and SFAS No. 127 in 1998 did not have a significant effect on the
Company's financial position or results of operations.
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 129, "Disclosure of Information About Capital Structure," which is effective
for the Company's 1998 financial statements. The Company's disclosures comply
with the provisions of this Statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This Statement establishes standards for reporting and displaying comprehensive
income, which is defined as all changes to equity except investments by and
distributions to shareholders. Net income is a component of comprehensive
income, with all other components referred to in the aggregate as other
comprehensive income. The Company's financial statements comply with the
provisions of this Statement.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for the Company's
1998 financial statements. This Statement establishes standards for reporting
information about operating segments. An operating segment is defined as a
component of a business for which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and evaluate performance. The Company has determined
that its business is comprised of a single operating segment and that SFAS No.
131 therefore has no impact on its financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which is effective for the
Company's 1998 financial statements. This Statement standardizes disclosure
requirements for pensions and other postretirement benefits to the extent
practicable. The Company's disclosures comply with the provisions of this
Statement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in its
balance sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The Company is required to adopt this
Statement effective January 1, 2000. Through December 31, 1998, the Company's
use of derivative instruments has not been material.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(2) Reorganization and Stock Offering (Dollars in Thousands, Except Per Share
Data)
The Company is a Massachusetts corporation that was organized in November 1997
for the purpose of acquiring all of the capital stock of the Bank upon
completion of the Bank's reorganization from a mutual savings bank into a mutual
holding company structure. As part of the reorganization, the Company offered
for sale 47% of the shares of its common stock in an offering fully subscribed
for by eligible depositors of the Bank (the "Offering"). The remaining 53% of
the Company's shares of common stock were issued to Brookline Bancorp, MHC (the
"MHC"), a state-chartered mutual holding company incorporated in Massachusetts.
The reorganization and Offering were completed on March 24, 1998. Prior to that
date, the Company had no assets or liabilities. The reorganization has been
accounted for as an "as if" pooling with assets and liabilities recorded at
historical cost.
Completion of the Offering resulted in the issuance of 29,095,000 shares of
common stock, 15,420,350 shares (53%) of which were issued to the MHC and
13,674,650 shares (47%) of which were sold to eligible depositors of the Bank at
$10.00 per share. Costs related to the Offering (primarily marketing fees paid
to an underwriting firm, professional fees, registration fees, and printing and
mailing costs) aggregated $1,957 and have been deducted to arrive at net
proceeds of $134,790 from the Offering. The Company contributed 50% of the net
proceeds of the Offering to the Bank for general corporate use. Net Offering
proceeds retained by the Company were used to fund a loan to the Bank's employee
stock ownership plan, acquire investment securities and repurchase shares of the
Company's common stock in the open market.
As part of the Offering and as required by regulation, the Bank established a
liquidation account equal to $58,924, or 47% of the retained earnings of the
Bank as of August 31, 1997, the date of the latest balance sheet presented in
the Offering prospectus. The liquidation account is for the benefit of eligible
account holders and supplemental eligible account holders who maintain their
deposit accounts at the Bank after the Offering. In the unlikely event of a
complete liquidation of the Bank (and only in that event), eligible depositors
who continue to maintain deposit accounts at the Bank shall be entitled to
receive a distribution from the liquidation account. The liquidation account
balance is reduced annually to the extent that eligible depositors have reduced
their qualifying deposits as of each anniversary date. Subsequent increases in
deposit account balances do not restore an account holder's interest in the
liquidation account. The liquidation account approximated $18,893 at December
31, 1998.
(3) Cash and Short-Term Investments (In Thousands)
Aggregate reserves (in the form of deposits with the Federal Reserve Bank and
vault cash) of $1,209 and $1,558 were maintained to satisfy federal regulatory
requirements at December 31, 1998 and 1997, respectively.
Short-term investments are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Repurchase agreements........................... $ 12,000 $ --
Money market funds.............................. 7,560 7,570
Federal funds................................... 2,038 4,000
Other deposits.................................. 1,062 100
---------- ----------
$ 22,660 $ 11,670
========== ==========
</TABLE>
Short-term investments are stated at cost which approximates market. Money
market funds are invested in a mutual fund whose assets are comprised primarily
of U.S. Treasury obligations, commercial paper and certificates of deposit with
average maturities of 90 days or less.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(4) Investment Securities (In Thousands)
Securities available for sale and held to maturity are summarized below:
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations.......... $ 88,186 $ 624 $ -- $ 88,810
Corporate obligations........................... 8,218 12 47 8,183
Collateralized mortgage obligations............. 5,982 -- 41 5,941
----------- ---------- --------- ----------
Total debt securities......................... 102,386 636 88 102,934
Marketable equity securities....................... 7,939 22,695 39 30,595
----------- ---------- --------- ----------
Total securities available for sale........... $ 110,325 $ 23,331 $ 127 $ 133,529
=========== ========== ========= ==========
Securities held to maturity:
U.S. Government and Agency obligations............. $ 4,014 $ 24 $ -- 4,038
Corporate obligations.............................. 116,426 659 73 117,012
Mortgage-backed securities......................... 950 44 1 993
----------- ---------- --------- ----------
Total securities held to maturity............. $ 121,390 $ 727 $ 74 $ 122,043
=========== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
----------- ---------- --------- ----------
Securities available for sale:
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government and Agency obligations.......... $ 74,088 $ 213 $ 14 $ 74,287
Corporate obligations........................... 15,341 16 24 15,333
----------- ---------- --------- ----------
Total debt securities......................... 89,429 229 38 89,620
Marketable equity securities....................... 6,168 21,881 32 28,017
----------- ---------- --------- ----------
Total securities available for sale........... $ 95,597 $ 22,110 $ 70 $ 117,637
=========== ========== ========= ==========
Securities held to maturity:
U.S. Government and Agency obligations............. $ 8,032 $ 4 $ 4 $ 8,032
Corporate obligations.............................. 56,147 123 16 56,254
Mortgage-backed securities......................... 1,265 56 7 1,314
----------- ---------- --------- ----------
Total securities held to maturity............. $ 65,444 $ 183 $ 27 $ 65,600
=========== ========== ========= ==========
</TABLE>
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Restricted equity securities are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
---------- ----------
<S> <C> <C>
Federal Home Loan Bank of Boston stock............... $ 4,921 $ 3,468
Massachusetts Savings Bank Life
Insurance Company stock............................ 253 253
---------- ----------
$ 5,174 $ 3,721
========== ==========
</TABLE>
As a voluntary member of the Federal Home Loan Bank of Boston ("FHLB"), the
Company is required to invest in $100 par value stock of the FHLB in an amount
equal to 1% of its outstanding home loans or 5% of its outstanding advances from
the FHLB, whichever is higher. As and when such stock is redeemed, the Company
would receive from the FHLB an amount equal to the par value of the stock. At
its discretion, the FHLB may declare dividends on the stock. Such dividends
amounted to $260, $212 and $183 for the years ended December 31, 1998, 1997 and
1996, respectively.
The maturities of the investments in debt securities at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Available for sale
-------------------------------
Amortized Estimated
Maturity cost fair value
- - -------- ---------- ----------
<S> <C> <C>
Within 1 year...................................................................... $ 48,021 $ 48,264
After 1 year through 5 years....................................................... 53,819 54,151
After 5 years through 10 years..................................................... -- --
Over 10 years...................................................................... 546 519
---------- ----------
$ 102,386 $ 102,934
========== ==========
Held to maturity
-------------------------------
Amortized Estimated
Maturity cost fair value
- - -------- ---------- ----------
Within 1 year...................................................................... $ 45,917 $ 46,119
After 1 year through 5 years....................................................... 74,023 74,431
After 5 years through 10 years..................................................... 866 876
Over 10 years...................................................................... 584 617
---------- ----------
$ 121,390 $ 122,043
========== ==========
</TABLE>
Mortgage-backed securities are included above based on their contractual
maturities (primarily in excess of 10 years); the expected lives, however, are
expected to be shorter due to anticipated payments.
Sales of investment securities, all of which were marketable equity securities,
are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1998 1997 1996
------- --------- ----------
<S> <C> <C> <C>
Proceeds from sales........................................................... $ 3,687 $ 752 $ 2,712
Gross gains from sales........................................................ 2,843 74 469
Gross losses from sales....................................................... -- -- 5
</TABLE>
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(5) Loans (In Thousands)
A summary of loans follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Mortgage loans:
One-to-four family ............................................................. $ 64,467 $ 68,907
Multi-family.................................................................... 262,678 219,909
Commercial real estate.......................................................... 197,593 149,540
Construction and development.................................................... 17,255 13,382
Home equity..................................................................... 5,505 5,276
Second.......................................................................... 13,944 15,855
------------- ------------
Total mortgage loans........................................................ 561,442 472,869
Commercial loans................................................................... 13,051 9,074
Consumer loans..................................................................... 1,775 1,393
------------- ------------
Total gross loans........................................................... 576,268 483,336
Unadvanced funds on loans.......................................................... (26,096) (9,352)
Deferred loan origination fees..................................................... (1,604) (1,562)
Unearned discounts................................................................. (10) (10)
------------- ------------
Loans, excluding money market loan participations........................... 548,558 472,412
Money market loan participations................................................... 44,300 24,000
------------- ------------
$ 592,858 $ 496,412
============= ============
</TABLE>
The Company's portfolio, other than money market loan participations, is
substantially concentrated within Massachusetts. Money market loan
participations represent purchases of a portion of loans to national companies
and organizations originated and serviced by money center banks. Such
participations generally mature between one day and three months.
The recorded investment in impaired loans, as defined by SFAS No. 114 at the
dates indicated, is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
---------- ----------
<S> <C> <C>
One-to-four family mortgage loans.................................................. $ 35 $ --
Multi-family mortgage loans........................................................ 110 134
Commercial real estate mortgage loans.............................................. 1,255 2,032
---------- ----------
$ 1,400 $ 2,166
========== ==========
</TABLE>
The average recorded investment in impaired loans for the years ended December
31, 1998, 1997 and 1996 amounted to $1,550 $4,539 and $11,427, respectively.
None of the impaired loans at December 31, 1998 and 1997 required an allowance
for impairment due primarily to prior charge-offs and/or the sufficiency of
collateral values. If interest payments on all impaired loans at December 31,
1998, 1997 and 1996 had been made in accordance with original loan agreements,
interest income of $188, $281 and $951 would have been recognized on the loans
in 1998, 1997 and 1996 compared to interest income actually recognized of $318,
$183 and $844, respectively.
Non-accrual loans amounted to $332 and $803 at December 31, 1998 and 1997,
respectively. Effective January 1, 1998, all non-accrual loans are included in
impaired loans. If interest payments on all non-accrual loans at December 31,
1997 and 1996 had been made in accordance with original loan agreements,
interest income of $80 in 1997 and $201 in 1996 would have been recognized on
the loans compared to interest income actually recognized of $6 and $39,
respectively.
Restructured loans amounted to $0 and $2,287 at December 31, 1998 and 1997,
respectively. Of the total at December 31, 1997, $1,137 was included in impaired
loans at that date. Restructured loans represent performing multi-family and
commercial real estate mortgage loans for which concessions (such as reductions
of interest rates to below market terms and/or extension of repayment terms)
have been granted due to the borrower's financial condition. If interest
payments on restructured loans not included in impaired loans at December 31,
1998, 1997 and 1996 had been made in accordance with original loan agreements,
interest income of $82, $108 and $70 would have been recognized on the loans in
1998, 1997 and 1996 compared to interest income actually recognized of $327, $46
and $134, respectively.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
A portion of certain commercial real estate loans originated and serviced by the
Company are sold periodically to other banks on a non-recourse basis. The
balance of loans acquired by other banks amounted to $12,227 and $13,610 at
December 31, 1998 and 1997, respectively. No fees are collected by the Company
for servicing such loan participations.
In the ordinary course of business, the Company makes loans to its Directors and
their related interests, generally at the same prevailing terms as those of
other borrowers. A summary of related party activity follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Balance at beginning of year....................................................... $ 5,969 $ 6,176
New loans granted during the year.................................................. 1,169 --
Repayments......................................................................... (457) (207)
------- -------
Balance at end of year............................................................. $ 6,681 $ 5,969
======= =======
</TABLE>
(6) Allowance for Loan Losses (In Thousands)
An analysis of the allowance for loan losses for the years indicated follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Balance at beginning of year....................................................... $ 12,463 $ 12,326 $ 12,326
Provision for loan losses.......................................................... 300 -- --
Charge-offs........................................................................ (1) (6) (166)
Recoveries......................................................................... 332 143 166
---------- ----------- ----------
Balance at end of year............................................................. $ 13,094 $ 12,463 $ 12,326
========== =========== ==========
</TABLE>
(7) Bank Premises and Equipment (In Thousands)
Bank premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Land ............................................................................ $ 62 62
Office building and improvements................................................... 1,906 1,917
Furniture, fixtures and equipment.................................................. 1,410 1,737
----------- ---------
3,378 3,716
Accumulated depreciation and amortization.......................................... 2,194 2,355
----------- ---------
$ 1,184 $ 1,361
=========== =========
</TABLE>
(8) Other Real Estate Owned (In Thousands)
The composition of other real estate owned as of the dates indicated is as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Commercial real estate........................................................... $ 1,946 $ 1,902
Residential...................................................................... 180 657
----------- -----------
2,126 2,559
Valuation allowance.............................................................. 186 186
----------- -----------
$ 1,940 $ 2,373
=========== ===========
</TABLE>
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
An analysis of the valuation allowance for the years indicated follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year....................................................... $ 186 $ 221 $ 319
Provision for losses............................................................... -- -- --
Write-downs........................................................................ -- (35) (98)
-------- -------- --------
Balance at end of year............................................................. $ 186 $ 186 $ 221
======== ======== ========
</TABLE>
Net other real estate owned income for the years indicated is comprised of the
following:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Rental income...................................................................... $ 383 $ 361 $ 272
Operating and foreclosure expenses................................................. (154) (135) (122)
Gains from sales................................................................... 22 12 149
-------- -------- --------
$ 251 $ 238 $ 299
======== ======== ========
</TABLE>
(9) Deposits (Dollars In Thousands)
A summary of deposits follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------------- ---------------------------
Weighted Weighted
average average
Amount rate Amount rate
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Demand checking accounts........................................... $ 12,355 0.00% $ 10,582 0.00%
NOW accounts....................................................... 42,950 1.50 40,211 1.75
Savings accounts................................................... 12,838 2.50 14,090 2.50
Money market savings accounts...................................... 173,173 3.89 161,335 3.88
----------- -----------
Total transaction deposit accounts........................... 241,316 3.19 226,218 3.23
----------- -----------
Certificate of deposit accounts maturing:
Within six months............................................... 123,547 5.13 136,788 5.44
After six months but within 1 year.............................. 71,081 5.37 65,771 5.52
After 1 year but within 2 years................................. 31,737 6.03 26,336 5.97
After 2 years but within 3 years................................ 12,197 5.77 16,600 6.68
After 3 years................................................... 9,492 5.97 10,591 6.13
----------- -----------
Total certificate of deposit accounts........................ 248,054 5.38 256,086 5.62
----------- -----------
$ 489,370 4.30% $ 482,304 4.50%
=========== ===========
</TABLE>
Certificate of deposit accounts issued in amounts of $100 or more totaled
$47,798 and $42,423 at December 31, 1998 and 1997, respectively.
Interest expense on deposit balances is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
NOW accounts....................................................................... $ 617 $ 645 $ 641
Savings accounts................................................................... 356 377 426
Money market savings accounts...................................................... 6,349 6,109 5,957
Certificate of deposit accounts.................................................... 13,877 14,569 14,751
---------- ----------- ----------
$ 21,199 $ 21,700 $ 21,775
========== =========== ==========
</TABLE>
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(10) Borrowed Funds (Dollars In Thousands)
Borrowed funds are comprised of the following advances from the FHLB:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------- ----------------------
Weighted Weighted
average average
Amount rate Amount rate
---------- ---- ---------- ----
<S> <C> <C> <C> <C>
Within 1 year ................................................... $ 11,550 6.79% $ 20,665 5.98%
Over 1 year to 2 years............................................. 9,400 6.24 11,550 6.79
Over 2 years to 3 years............................................ 9,350 6.66 9,400 6.24
Over 3 years to 4 years............................................ 15,300 6.32 9,350 6.66
Over 4 years to 5 years............................................ 30,750 5.29 15,300 6.32
Over 5 years ................................................... 18,000 6.06 3,000 6.39
---------- ----------
$ 94,350 6.02% $ 69,265 6.33%
========== ==========
</TABLE>
The advances are secured by all the Bank's stock and deposits in the FHLB and a
general lien on one-to-four family residential mortgage loans and U.S.
Government and Agency obligations in an aggregate amount equal to outstanding
advances.
(11) Income Taxes (Dollars in Thousands)
Provision for income taxes are comprised of the following amounts:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Current:
Federal......................................................................... $ 10,450 $ 7,474 $ 5,957
State........................................................................... 863 155 1,773
---------- ----------- ----------
11,313 7,629 7,730
---------- ----------- ----------
Deferred:
Federal......................................................................... (404) (384) (31)
State........................................................................... (78) 82 52
----------- ----------- ----------
(482) (302) 21
----------- ------------ ----------
$ 10,831 $ 7,327 $ 7,751
========== =========== ==========
</TABLE>
The reduction in state income tax expense for the years ended December 31, 1998
and 1997 is attributable primarily to the establishment of a real estate
investment trust.
Total income tax expense differed from the amounts computed by applying the
statutory U.S. federal income tax rate (between 34% and 35% for the years
presented) to income before tax expense as a result of the following:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected income tax expense at
statutory federal tax rate................................................ $ 10,494 $ 7,322 $ 6,891
State taxes, net of federal income tax benefit.............................. 473 155 1,204
Dividend income received deduction.......................................... (173) (173) (167)
Change in federal tax rate applied to deferred
income taxes.............................................................. -- -- (123)
Other, net.................................................................. 37 23 (54)
--------- --------- ---------
$ 10,831 $ 7,327 $ 7,751
========= ========= =========
Effective income tax rates.................................................. 36.1% 34.8% 39.4%
==== ==== ====
</TABLE>
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at the dates indicated are as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
--------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses....................................................... $ 5,423 $ 5,187
Pension and postretirement benefits............................................. 1,510 1,296
Depreciation.................................................................... 38 8
Other........................................................................... 154 156
--------- ---------
Total gross deferred tax assets.............................................. 7,125 6,647
--------- ---------
Deferred tax liabilities:
Unrealized gain on securities available for sale................................ 8,787 8,301
Post-1987 bad debt reserves..................................................... 114 153
Savings Bank Life Insurance Company stock....................................... 108 108
Other........................................................................... 161 126
--------- ---------
Total gross deferred tax liabilities......................................... 9,170 8,688
--------- ---------
Net deferred tax liability................................................... $ 2,045 $ 2,041
========= =========
</TABLE>
For income tax purposes, in 1997, the Company changed its fiscal year end date
from October 31 to December 31. Historically, the Company has been subject to
special provisions in the tax law regarding allowable tax bad debt deductions
and related reserves. Bad debt deductions were determined based on loss
experience or a percentage of taxable income. The bad debt reserve balance
represents allowable deductions in excess of actual losses and consists of a
defined base-year amount (accumulated through October 31, 1988) and additional
amounts accumulated after that date.
Tax law changes were enacted in August 1996 that eliminated use of the
percentage of taxable income method for tax years after 1995 (after October 31,
1996 in the case of the Company) and required recapture into taxable income over
a six year period all bad debt reserves accumulated after October 31, 1988. The
Company had previously recorded a deferred tax liability with respect to these
post-1987 reserves and, therefore, this new requirement had no effect on the
Company's income tax expense or net income.
The tax law changes also require recapture of pre-1988 bad debt reserves into
taxable income if the Bank makes "non-dividend distributions." Non-dividend
distributions is defined as distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. The amount of additional taxable income from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes a
non-dividend distribution to the Company, approximately one and one-half times
the amount of such distribution (but not in excess of the amount of such
reserves) would be includable in income for federal income tax purposes,
assuming a 35% federal corporate income tax rate. The Bank does not intend to
pay dividends that would result in recapture of any portion of its bad debt
reserves, and accordingly, has not provided for any portion of the $772
liability relating to the balance of its pre-1988 bad debt reserves.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(12) Employee Benefits (Dollars In Thousands)
Pension and Postretirement Benefits
The Company sponsors a non-contributory defined benefit pension plan and other
postretirement benefits. The pension plan covers all employees who meet specific
age and length of service requirements and provides for benefits to be paid to
eligible employees at retirement based primarily upon their years of service
with the Company and the average of their three highest consecutive years of
compensation. Other postretirement benefits provide for part of the annual
expense of health insurance premiums for retired employees and their dependents.
The following table provides a reconciliation of the changes in the benefit
obligations and fair value of assets for the defined pension plan and
postretirement benefits for the years ended October 31, the latest plan
valuation dates.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
----------------------------- ---------------------------
1998 1997 1998 1997
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation:
Obligation at beginning of period................... $ 4,706 $ 4,338 $ 409 $ 366
Service cost........................................ 247 247 31 29
Interest cost....................................... 341 325 31 26
Actuarial (gain) loss............................... (139) (14) 71 --
Benefit payment..................................... (191) (190) (12) (12)
----------- --------- ---------- ---------
Obligation at end of period...................... $ 4,964 $ 4,706 $ 530 $ 409
=========== ========= ========== =========
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of period.... $ 5,523 $ 4,833 $ -- $ --
Actual return on plan assets........................ 444 880 -- --
Benefit payments.................................... (191) (190) -- --
----------- --------- ---------- ---------
Fair value of plan assets at end of period....... $ 5,776 $ 5,523 $ -- $ --
=========== ========= ========== =========
Funded status:
Funded status at end of period...................... $ 812 $ 817 $ (530) $ (409)
Unrecognized (gain) loss............................ (2,107) (2,055) 2 (74)
Unrecognized transition asset....................... (55) (58) 296 313
----------- --------- --------- ---------
Net amount recognized as a liability in the
Company's balance sheet as of October 31......... $ (1,350) $ (1,296) $ (232) $ (170)
=========== ========= ========= =========
</TABLE>
The defined benefit pension plan assets are invested primarily in U.S.
Government obligations and equity securities.
The following table provides the components of net periodic benefit cost for the
plans for the years ended October 31.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
----------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Service cost...................... $ 247 $ 247 $ 276 $ 31 $ 29 $ 24
Interest cost..................... 341 325 328 31 26 26
Expected return on plan assets.... (442) (387) (326) -- -- --
Transition obligation............. (3) (3) (3) 17 13 18
Actuarial gain.................... (90) (67) (10) -- -- --
---------- ---------- ---------- ---------- ----------- ----------
Net periodic benefit costs.... $ 53 $ 115 $ 265 $ 79 $ 68 $ 68
========== ========== ========== ========== =========== ==========
</TABLE>
The pension and postretirement benefits expense for the years ended December 31,
1998, 1997 and 1996 amounted to $130, $150 and $332, respectively.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Assumptions used in determining the actuarial present value of the projected
benefit obligations are shown in the following table:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
----------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Discount rate......................... 7.25% 7.50% 7.00% 6.75% 7.50% 7.50%
Rate of Increase in compensation...... 6.00 6.00 6.00 N/A N/A N/A
Expected long-term rate of return
on plan assets.................... 8.00 8.00 8.00 N/A N/A N/A
</TABLE>
The assumed health care trend used to measure the accumulated postretirement
benefit obligation was 7% initially, decreasing gradually to 5% in 2001and
thereafter. Assumed health care trend rates may have a significant effect on the
amounts reported for the postretirement benefit plan. A 1% change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
<S> <C> <C>
Effect on total service and interest cost components
of net periodic postretirement benefit costs.......................... $14 $(15)
Effect on the accumulated postretirement benefit
obligation............................................................ 91 (94)
</TABLE>
Supplemental Executive Retirement Agreements
The Company maintains agreements that provide supplemental retirement benefits
to certain executive officers. Total expense for benefits payable under the
agreement amounted to $425, $503 and $311 for the years ended December 31, 1998,
1997 and 1996, respectively. Aggregate benefits payable included in accrued
expenses and other liabilities at December 31, 1998 and 1997 amounted to $1,973
and $1,548, respectively.
Employee Stock Ownership Plan
On March 24, 1998, the Board of Directors approved an Employee Stock Ownership
Plan ("ESOP") that became effective November 1, 1997. The Plan is designed to
provide eligible employees the advantage of ownership of Company stock.
Employees are eligible to participate in the Plan after reaching age twenty-one,
completing one year of service and working at least one thousand hours of
consecutive service during the year. Contributions are allocated to eligible
participants on the basis of compensation.
The ESOP is authorized to purchase in the open market up to 4% of the common
stock sold in the Offering, or 546,986 shares, and borrow up to $7,500 from the
Company to finance the purchase of such shares. The loan is payable in quarterly
installments over 30 years and bears interest at 8.50% per annum. The loan can
be prepaid without penalty. Loan payments are principally funded by cash
contributions from the Bank, subject to IRS limitations.
Shares used as collateral to secure the loan are released and available for
allocation to eligible employees as the principal and interest on the loan is
paid. Employees vest in their ESOP account at a rate of 20% annually commencing
in the year of completion of three years of credited service or immediately if
service is terminated due to death, retirement, disability or change in control.
Employees of the Bank as of October 31, 1997 received credit for vesting
purposes for each continuous year of service involving at least one thousand
hours up to a maximum of three years of credited service. Dividends on released
shares are credited to the participants' ESOP accounts. Dividends on unallocated
shares are generally applied towards payment of the loan. ESOP shares committed
to be released are considered outstanding in determining earnings per share.
At December 31, 1998, the ESOP held 386,457 unallocated shares at an aggregate
cost of $4,941; the market value of such shares at that date was $4,444. For the
year ended December 31, 1998, $291 was charged to compensation and employee
benefits expense based on the commitment to release 21,143 shares to eligible
employees.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
401(K) Plan
The Company has an employee tax deferred thrift incentive plan under Section
401(k) of the Internal Revenue Code. All employees who meet specified age and
length of service requirements are eligible for voluntary participation in the
Plan. The Plan is administered by SBERA and the Company makes no contribution to
the Plan.
(13) Commitments and Contingencies (In Thousands)
Off-Balance Sheet Financial Instruments
The Company is party to off-balance sheet risk in the normal course of business
to meet the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit and involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the consolidated balance sheet. The contract
amounts reflect the extent of the involvement the Company has in particular
classes of these instruments. The Company's exposure to credit loss in the event
of nonperformance by the other party to the financial instrument is represented
by the contractual amount of those instruments. The Company uses the same
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Financial instruments with off-balance sheet risk at the dates indicated
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans:
One-to-four family mortgage...................................................... $ 2,877 $ 5,569
Multi-family mortgage............................................................ 10,200 10,448
Commercial real estate mortgage.................................................. 29,404 8,705
Construction and development mortgage............................................ 2,185 3,796
Commercial....................................................................... 763 3,215
Unadvanced portion of loans......................................................... 26,096 9,352
Unused lines of credit:
Equity........................................................................... 7,925 8,803
Other............................................................................ 1,335 1,365
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee by the customer. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's credit-worthiness on a case-by-case basis. The amount of collateral
obtained, if any, is based on management's credit evaluation of the borrower.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Lease Commitments
The Company leases certain office space under various noncancellable operating
leases. A summary of future minimum rental payments under such leases at the
dates indicated follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C> <C>
1999............................................................. $ 300
2000............................................................. 295
2001............................................................. 275
2002............................................................. 176
2003............................................................. 176
</TABLE>
The leases contain escalation clauses for real estate taxes and other
expenditures. Total rental expense was $307, $305 and $258 for the years ended
December 31, 1998, 1997 and 1996, respectively.
SWAP Agreement
Effective April 14, 1998, the Company entered into an interest-rate swap
agreement with a third-party that matures April 14, 2005. The notional amount of
the agreement is $5,000. Under this agreement, each quarter the Company pays
interest on the notional amount at an annual fixed rate of 5.9375% and receives
from the third-party interest on the notional amount at the floating three month
U.S. dollar LIBOR rate. The Company entered into this transaction to match more
closely the repricing of its assets and liabilities and to reduce its exposure
to increases in interest rates. The net interest expense paid was $13 for the
year ended December 31, 1998.
Legal Proceedings
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consulting with legal counsel,
the consolidated financial position and results of operations of the Company
will not be affected materially by the outcome of such proceedings.
(14) Stockholders' Equity (Dollars in Thousands, Except Per Share Data)
Preferred Stock
The Company is authorized to issue 5,000,000 shares of serial preferred stock,
par value $0.01 per share, from time to time in one or more series subject to
limitations of law, and the Board of Directors is authorized to fix the
designations, powers, preferences, limitations and rights of the shares of each
such series. As of December 31, 1998, there were no shares of preferred stock
issued.
Common Stock Repurchases and Dividends
On October 20, 1998, the Company received regulatory approval to repurchase
1,454,750 shares, or 5% of the common shares issued by the Company. The approval
sets no time limit for the repurchases. Shares may not be repurchased, nor may
the Company or the Bank declare or pay dividends to common stockholders if the
effect thereof would cause stockholders' equity to be reduced below the required
liquidation account balance (see note 2) or minimum regulatory capital levels.
As of December 31,1998, the Company acquired 113,500 shares at an aggregate cost
of $1,316.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(15) Regulatory Capital Requirements (Dollars In Thousands)
Bank regulatory agencies have established capital adequacy standards which are
used extensively in their monitoring and control of the industry. These
standards relate capital to average assets and to level of risk by assigning
different weighting to assets and certain off-balance sheet activity. The
capital ratios of the Company (on a consolidated basis) and the Bank set forth
below currently exceed the minimum ratios for "well capitalized" banks as
defined by federal regulators.
<TABLE>
<CAPTION>
Minimum To
Minimum Be Categorized As
Actual Capital Requirement Well Capitalized
-------------------------- --------------------------- -------------------------
At December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
- - -------------------- ------------- ----------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tier I Capital (to average assets):
The Company $ 263,857 31.15% $ 33,880 4.00% N/A --
The Bank 203,978 25.86 31,553 4.00 $ 39,441 5.00%
Tier I Capital (to risk-weighted assets):
The Company 263,857 37.48 28,158 4.00 N/A -
The Bank 203,978 29.34 27,812 4.00 41,718 6.00
Total Capital (to risk-weighted assets):
The Company 282,904 40.19 56,315 8.00 N/A -
The Bank 222,898 32.06 55,624 8.00 69,530 10.00
</TABLE>
<TABLE>
<CAPTION>
Minimum To
Minimum Be Categorized As
Actual Capital Requirement Well Capitalized
-------------------------- --------------------------- -------------------------
At December 31, 1997(A) Amount Ratio Amount Ratio Amount Ratio
- - ----------------------- ------------- ----------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tier I Capital (to average assets)
The Bank $ 119,069 17.82% $ 26,730 4.00% $ 33,412 5.00%
Tier I Capital (to risk-weighted assets):
The Bank 119,069 21.49 22,166 4.00 33,249 6.00
Total Capital (to risk-weighted assets):
The Bank 126,064 22.75 44,332 8.00 55,415 10.00
</TABLE>
(A) No information is presented for The Company as it had no assets or
liabilities at December 31, 1997.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(16) Fair Value of Financial Instruments (In Thousands)
The following is a summary of the carrying values and estimated fair values of
the Company's significant financial and non-financial instruments as of the
dates indicated:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks........................... $ 6,657 $ 6,657 $ 8,843 $ 8,843
Short-term investments............................ 22,660 22,660 11,670 11,670
Securities........................................ 260,093 260,746 186,802 186,958
Loans, net........................................ 579,764 583,658 483,949 486,192
Accrued interest receivable....................... 6,457 6,457 5,240 5,240
Financial liabilities:
Demand, NOW, savings and money
market savings deposit accounts................. 241,316 241,316 226,218 226,218
Certificate of deposit accounts................... 248,054 248,888 256,086 255,226
Borrowed funds.................................... 94,350 95,731 69,265 68,848
Swap agreement.................................... -- 197 -- --
</TABLE>
SFAS No. 107 requires disclosures about fair values of financial instruments for
which it is practicable to estimate fair value. Fair value is defined in SFAS
No. 107 as the amount that a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced liquidation
sale. Quoted market prices are used to estimate fair values when those prices
are available. However, active markets do not exist for many types of financial
instruments. Consequently, fair values for these instruments must be estimated
by management using techniques such as discounted cash flow analysis and
comparison to similar instruments. These instruments are highly subjective and
require judgments regarding significant matters such as the amount and timing of
future cash flows and the selection of discount rates that may appropriately
reflect market and credit risks. Changes in these judgments often have a
material impact on the fair value estimates. In addition, since these estimates
are as of a specific point in time, they are susceptible to material near-term
changes. Fair values disclosed in accordance with SFAS No. 107 do not reflect
any premium or discount that could result from the sale of a large volume of a
particular financial instrument, nor do they reflect the possible tax
ramifications or estimated transaction costs.
The following is a description of the principal valuation methods used by the
Company to estimate the fair values of its financial instruments:
Securities
The fair values of securities were based principally on market prices and dealer
quotes. Certain fair values were estimated using pricing models or were based on
comparisons to market prices of similar securities. The fair value of stock in
the FHLB equals its carrying amount since such stock is only redeemable at its
par value.
Loans
The fair value of performing loans, other than money market loan participations,
is estimated by discounting the contractual cash flows using interest rates
currently being offered for loans with similar terms to borrowers of similar
quality. The fair value of money market loan participations is considered to
equal their carrying amounts since such loans generally are repayable within 90
days. For non-performing loans where the credit quality of the borrower has
deteriorated significantly, fair values are estimated by discounting cash flows
at a rate commensurate with the risk associated with those cash flows.
Deposit Liabilities
In accordance with SFAS No. 107, the fair values of deposit liabilities with no
stated maturity (demand, NOW, savings and money market savings accounts) are
equal to the carrying amounts payable on demand. The fair value of time deposits
represents contractual cash flows discounted using interest rates currently
offered on deposits with similar characteristics
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
and remaining maturities. The fair value estimates for deposits do not include
the benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of alternative forms of funding ("deposit based
intangibles").
Borrowed Funds
The fair value of borrowings from the FHLB represent contractual repayments
discounted using interest rates currently available for borrowings with similar
characteristics and remaining maturities.
Other Financial Assets and Liabilities
Cash and due from banks, short-term investments and accrued interest receivable
have fair values which approximate the respective carrying values because the
instruments are payable on demand or have short-term maturities and present
relatively low credit risk and interest rate risk.
Off-Balance Sheet Financial Instruments
In the course of originating loans and extending credit, the Company will charge
fees in exchange for its commitment. While these commitment fees have value, the
Company has not estimated their value due to the short-term nature of the
underlying commitments and their immateriality.
Swap Agreement
The fair value is estimated as the difference in the present value of future
cash flows between the Company's existing agreement and current market rate
agreements of the same duration.
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(17) Condensed Parent Company Financial Statements (Dollars In Thousands)
Condensed parent company financial statements as of and for the period from
March 24, 1998 (the date the Company commenced operations) through December 31,
1998 follow.
<TABLE>
<CAPTION>
Balance Sheet
-------------
December 31,
1998
------------
<S> <C>
Assets
Cash and due from banks..................................... $ 33
Short-term investments...................................... 1,500
Money market loan participations............................ 2,000
Equity securities available for sale........................ 48
Loan to Bank ESOP........................................... 4,913
Accrued interest receivable................................. 7
Investment in subsidiaries, at equity....................... 274,726
------------
Total assets.......................................... $ 283,227
============
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities...................... 50
Deferred income tax liability............................... 5
------------
Total liabilities..................................... 55
Total stockholders' equity.................................. 283,172
------------
Total liabilities and stockholders' equity............ $ 283,227
============
</TABLE>
The Company's consolidated stockholders' equity is $ 4,950 less than the amount
presented above because of the elimination of the effect of unallocated ESOP
shares in consolidation.
<TABLE>
<CAPTION>
Statement of Income
-------------------
Period From March 24,
1998 Through
December 31, 1998
----------
<S> <C>
Interest income:
Short-term investments................................................. $ 248
Money market loan participations....................................... 450
Loan to Bank ESOP...................................................... 188
----------
Total interest income............................................... 886
----------
Expenses:
Directors' fees........................................................ 39
Other.................................................................. 45
----------
Total expenses...................................................... 84
----------
Income before income taxes and equity in undistributed net
income of subsidiaries........................................... 802
Income taxes.............................................................. 338
----------
Income before equity in undistributed net income of subsidiaries.... 464
Equity in undistributed net income of subsidiaries........................ 15,303
----------
Net income.......................................................... $ 15,767
==========
</TABLE>
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Statement of Cash Flows
Period from March
24, 1998 Through
December 31, 1998
-----------------
<S> <C>
Cash flows from operating activities:
Net income............................................................. $ 15,767
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiaries............... (15,303)
Deferred income taxes............................................ 3
Increase in accrued interest receivable.......................... (7)
Increase in accrued expenses and other liabilities............... 61
----------
Net cash used by operating activities...................... 521
----------
Cash flows from investing activities:
Investment in subsidiaries............................................. (122,597)
ESOP loan to subsidiary................................................ (5,248)
Repayment of ESOP loan by subsidiary................................... 335
Purchase of securities available for sale.............................. (42)
-----------
Net cash used for investing activities..................... (127,552)
----------
Cash flows from financing activities:
Net proceeds from issuance of common stock............................. 134,790
Purchase of treasury stock............................................. (1,316)
Payment of common stock dividends...................................... (2,910)
----------
Net cash provided by financing activities.................. 130,564
----------
Net increase in cash and cash equivalents................................. 3,533
Cash and cash equivalents at beginning of period.......................... --
----------
Cash and cash equivalents at end of period................................ $ 3,533
==========
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes........................... $ 227
</TABLE>
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(18) Quarterly Results of Operations (Unaudited, Dollars In Thousands Except Per
Share Data)
<TABLE>
<CAPTION>
1998 Quarters
--------------------------------------------------------
Fourth Third Second First
------ ----- ------ -----
<S> <C> <C> <C> <C>
Interest income................................. $ 15,838 $ 16,006 $ 15,219 $ 14,356
Interest expense................................ 6,729 6,467 6,274 6,690
--------- --------- --------- ---------
Net interest income.......................... 9,109 9,539 8,945 7,666
Provision for loan losses....................... 200 -- 100 --
--------- --------- --------- ---------
Net interest income after provision
for loan losses........................... 8,909 9,539 8,845 7,666
Gains on sales of securities, net............... 1,171 426 1,238 8
Other real estate owned income net.............. 86 64 52 49
Other non-interest income....................... 279 237 310 285
Non-interest expense............................ (2,420) (2,305) (2,331) (2,125)
--------- --------- --------- ---------
Income before income taxes................... 8,025 7,961 8,114 5,883
Provision for income taxes...................... 2,911 2,836 2,971 2,113
--------- --------- --------- ---------
Net income................................... $ 5,114 $ 5,125 $ 5,143 $ 3,770
========= ========= ========= =========
Basic and diluted earnings per share............ $ 0.18 $ 0.18 $ 0.18 NM
NM - Not meaningful
1997 Quarters
--------------------------------------------------------
Fourth Third Second First
--------- --------- --------- ---------
Interest income................................. $ 13,553 $ 13,424 $ 13,269 $ 13,879
Interest expense................................ 6,531 6,517 6,474 6,336
--------- --------- --------- ---------
Net interest income.......................... 7,022 6,907 6,795 7,543
Provision for loan losses....................... -- -- -- --
--------- --------- --------- ---------
Net interest income after provision
for loan losses........................... 7,022 6,907 6,795 7,543
Gains on sales of securities, net............... -- -- 70 4
Other real estate owned income, net............. 49 69 67 53
Other non-interest income....................... 230 166 306 151
Non-interest expense............................ (1,964) (2,137) (2,115) (2,158)
--------- --------- --------- ---------
Income before income taxes................... 5,337 5,005 5,123 5,593
Provision for income taxes...................... 1,876 1,699 1,752 2,000
--------- --------- --------- ---------
Net income................................... $ 3,461 $ 3,306 $ 3,371 $ 3,593
========= ========= ========= =========
</TABLE>
Basic and diluted earnings per share - not applicable
BROOKLINE SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
(adopted effective November 1, 1997)
<PAGE>
BROOKLINE SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
This Employee Stock Ownership Plan, executed on the 24th day of March,
1998, by Brookline Savings Bank, a Massachusetts-chartered stock savings bank
(the "Bank"),
W I T N E S S E T H T H A T
WHEREAS, the board of directors of the Bank has resolved to adopt an
employee stock ownership plan for eligible employees in accordance with the
terms and conditions presented to the directors;
NOW, THEREFORE, the Bank hereby adopts the following Plan setting forth
the terms and conditions pertaining to contributions by the Employer and the
payment of benefits to Participants and Beneficiaries.
IN WITNESS WHEREOF, the Bank has adopted this Plan and caused this
instrument to be executed by its duly authorized officers as of the above date.
ATTEST:
By:
- - ---------------------------------- ------------------------------------
Authorized Officer
<PAGE>
C O N T E N T S
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Section 1. Plan Identity.................................................................................-1-
-------------
1.1 Name..........................................................................................-1-
----
1.2 Purpose.......................................................................................-1-
-------
1.3 Effective Date................................................................................-1-
--------------
1.4 Fiscal Period.................................................................................-1-
-------------
1.5 Single Plan for All Employers.................................................................-1-
-----------------------------
1.6 Interpretation of Provisions..................................................................-1-
----------------------------
Section 2. Definitions...................................................................................-1-
-----------
Section 3. Eligibility for Participation.................................................................-6-
-----------------------------
3.1 Initial Eligibility...........................................................................-6-
-------------------
3.2 Definition of Eligibility Year................................................................-7-
------------------------------
3.3 Terminated Employees..........................................................................-7-
--------------------
3.4 Certain Employees Ineligible..................................................................-7-
----------------------------
3.5 Participation and Reparticipation.............................................................-7-
---------------------------------
3.6 Omission of Eligible Employee.................................................................-7-
-----------------------------
3.7 Inclusion of Ineligible Employee..............................................................-7-
--------------------------------
Section 4. Contributions and Credits.....................................................................-7-
-------------------------
4.1 Discretionary Contributions...................................................................-7-
---------------------------
4.2 Contributions for Stock Obligations...........................................................-8-
-----------------------------------
4.3 Definitions Related to Contributions..........................................................-8-
------------------------------------
4.4 Conditions as to Contributions................................................................-8-
------------------------------
4.5 Transfers.....................................................................................-9-
---------
Section 5. Limitations on Contributions and Allocations..................................................-9-
--------------------------------------------
5.1 Limitation on Annual Additions................................................................-9-
------------------------------
5.2 Coordinated Limitation With Other Plans......................................................-10-
---------------------------------------
5.3 Effect of Limitations........................................................................-11-
---------------------
5.4 Limitations as to Certain Participants.......................................................-11-
--------------------------------------
Section 6. Trust Fund and Its Investment................................................................-12-
-----------------------------
6.1 Creation of Trust Fund.......................................................................-12-
----------------------
6.2 Stock Fund and Investment Fund...............................................................-12-
------------------------------
6.3 Acquisition of Stock.........................................................................-12-
--------------------
6.4 Participants' Option to Diversify............................................................-13-
---------------------------------
Section 7. Voting Rights and Dividends on Stock.........................................................-14-
-----------------------------------
7.1 Voting and Tendering of Stock................................................................-14-
-----------------------------
7.2 Dividends on Stock...........................................................................-14-
-----------------
(i)
<PAGE>
Page No.
--------
Section 8. Adjustments to Accounts......................................................................-15-
-----------------------
8.1 Adjustments for Transactions.................................................................-15-
----------------------------
8.2 Valuation of Investment Fund.................................................................-15-
----------------------------
8.3 Adjustments for Investment Experience........................................................-15-
-------------------------------------
Section 9. Vesting of Participants' Interests...........................................................-15-
----------------------------------
9.1 Deferred Vesting in Accounts.................................................................-15-
----------------------------
9.2 Computation of Vesting Years.................................................................-16-
----------------------------
9.3 Full Vesting Upon Certain Events.............................................................-16-
--------------------------------
9.4 Full Vesting Upon Plan Termination...........................................................-17-
----------------------------------
9.5 Forfeiture, Repayment, and Restoral..........................................................-17-
-----------------------------------
9.6 Accounting for Forfeitures...................................................................-18-
--------------------------
9.7 Vesting and Nonforfeitability................................................................-18-
-----------------------------
Section 10. Payment of Benefits..........................................................................-18-
-------------------
10.1 Benefits for Participants....................................................................-18-
-------------------------
10.2 Time for Distribution........................................................................-18-
---------------------
10.3 Marital Status...............................................................................-19-
--------------
10.4 Delay in Benefit Determination...............................................................-19-
------------------------------
10.5 Accounting for Benefit Payments..............................................................-19-
-------------------------------
10.6 Options to Receive and Sell Stock............................................................-20-
---------------------------------
10.7 Restrictions on Disposition of Stock.........................................................-20-
------------------------------------
10.8 Continuing Loan Provisions; Creations of Protections and Rights..............................-21-
---------------------------------------------------------------
10.9 Direct Rollover of Eligible Distribution.....................................................-21-
----------------------------------------
10.10 Waiver of 30 Day Period After Notice of Distribution.........................................-21-
----------------------------------------------------
Section 11. Rules Governing Benefit Claims and Review of Appeals.........................................-22-
----------------------------------------------------
11.1 Claim for Benefits...........................................................................-22-
------------------
11.2 Notification by Committee....................................................................-22-
-------------------------
11.3 Claims Review Procedure......................................................................-22-
-----------------------
Section 12. The Committee and Its Functions..............................................................-22-
-------------------------------
12.1 Authority of Committee.......................................................................-22-
----------------------
12.2 Identity of Committee........................................................................-23-
---------------------
12.3 Duties of Committee..........................................................................-23-
-------------------
12.4 Valuation of Stock...........................................................................-23-
------------------
12.5 Compliance with ERISA........................................................................-23-
---------------------
12.6 Action by Committee..........................................................................-24-
-------------------
12.7 Execution of Documents.......................................................................-24-
----------------------
12.8 Adoption of Rules............................................................................-24-
-----------------
12.9 Responsibilities to Participants.............................................................-24-
--------------------------------
12.10 Alternative Payees in Event of Incapacity....................................................-24-
-----------------------------------------
(ii)
<PAGE>
Page No.
--------
12.11 Indemnification by Employers.................................................................-24-
----------------------------
12.12 Nonparticipation by Interested Member........................................................-24-
-------------------------------------
Section 13. Adoption, Amendment, or Termination of the Plan..............................................-24-
-----------------------------------------------
13.1 Adoption of Plan by Other Employers..........................................................-24-
-----------------------------------
13.2 Adoption of Plan by Successor................................................................-25-
-----------------------------
13.3 Plan Adoption Subject to Qualification.......................................................-25-
--------------------------------------
13.4 Right to Amend or Terminate..................................................................-25-
---------------------------
Section 14. Miscellaneous Provisions.....................................................................-26-
------------------------
14.1 Plan Creates No Employment Rights............................................................-26-
---------------------------------
14.2 Nonassignability of Benefits.................................................................-26-
----------------------------
14.3 Limit of Employer Liability..................................................................-26-
---------------------------
14.4 Treatment of Expenses........................................................................-26-
---------------------
14.5 Number and Gender............................................................................-26-
-----------------
14.6 Nondiversion of Assets.......................................................................-26-
----------------------
14.7 Separability of Provisions...................................................................-26-
--------------------------
14.8 Service of Process...........................................................................-26-
------------------
14.9 Governing Law................................................................................-26-
-------------
14.10 Employer Contributions Conditioned on Deductibility..........................................-26-
---------------------------------------------------
14.11 Unclaimed Accounts...........................................................................-27-
------------------
14.12 Qualified Domestic Relations Order...........................................................-27-
----------------------------------
Section 15. Top-Heavy Provisions.........................................................................-28-
--------------------
15.1 Top-Heavy Plan...............................................................................-28-
--------------
15.2 Super Top-Heavy Plan.........................................................................-28-
--------------------
15.3 Definitions..................................................................................-28-
-----------
15.4 Top-Heavy Rules of Application...............................................................-29-
------------------------------
15.5 Top-Heavy Ratio..............................................................................-30-
---------------
15.6 Minimum Contributions........................................................................-31-
---------------------
15.7 Minimum Vesting..............................................................................-31-
---------------
15.8 Top-Heavy Provisions Control in Top-Heavy Plan...............................................-31-
----------------------------------------------
</TABLE>
(iii)
<PAGE>
BROOKLINE SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
Section 1. Plan Identity.
1.1 Name. The name of this Plan is "Brookline Savings Bank Employee
Stock Ownership Plan."
1.2 Purpose. The purpose of this Plan is to describe the terms and
conditions under which contributions made pursuant to the Plan will be credited
and paid to the Participants and their Beneficiaries.
1.3 Effective Date. The Effective Date of this Plan is November 1, 1997
1.4 Fiscal Period. This Plan shall be operated on the basis of a
November 1 to October 31 fiscal year for the purpose of keeping the Plan's books
and records and distributing or filing any reports or returns required by law.
1.5 Single Plan for All Employers. This Plan shall be treated as a
single plan with respect to all participating Employers for the purpose of
crediting contributions and forfeitures and distributing benefits, determining
whether there has been any termination of Service, and applying the limitations
set forth in Section 5.
1.6 Interpretation of Provisions. The Employers intend this Plan and
the Trust to be a qualified stock bonus plan under Section 401(a) of the Code
and an employee stock ownership plan within the meaning of Section 407(d)(6) of
ERISA and Section 4975(e)(7) of the Code. The Plan is intended to have its
assets invested primarily in qualifying employer securities of one or more
Employers within the meaning of Section 407(d)(3) of ERISA, and to satisfy any
requirement under ERISA or the Code applicable to such a plan.
Accordingly, the Plan and Trust Agreement shall be interpreted and
applied in a manner consistent with this intent and shall be administered at all
times and in all respects in a nondiscriminatory manner.
Section 2. Definitions.
The following capitalized words and phrases shall have the meanings
specified when used in this Plan and in the Trust Agreement, unless the context
clearly indicates otherwise:
"Account" means a Participant's interest in the assets accumulated
under this Plan as expressed in terms of a separate account balance which is
periodically adjusted to reflect his Employer's contributions, the Plan's
investment experience, and distributions and forfeitures.
"Active Participant" means any Employee who has satisfied the
eligibility requirements of Section 3 and who qualifies as an Active Participant
for a particular Plan Year under Section 4.3.
<PAGE>
"Bank" means Brookline Savings Bank and any entity which succeeds to
the business of Brookline Savings Bank and adopts this Plan as its own pursuant
to Section 14.2.
"Beneficiary" means the person or persons who are designated by a
Participant to receive benefits payable under the Plan on the Participant's
death. In the absence of any designation or if all the designated Beneficiaries
shall die before the Participant dies or shall die before all benefits have been
paid, the Participant's Beneficiary shall be his surviving Spouse, if any, or
his estate if he is not survived by a Spouse. The Committee may rely upon the
advice of the Participant's executor or administrator as to the identity of the
Participant's Spouse.
"Break in Service" means any Plan Year in which an Employee has 500 or
fewer Hours of Service. Solely for this purpose, an Employee shall be considered
employed for his normal hours of paid employment during a Recognized Absence
(said Employee shall not be credited with more than 501 Hours of Service to
avoid a Break in Service), unless he does not resume his Service at the end of
the Recognized Absence. Further, if an Employee is absent for any period
beginning on or after January 1, 1985, (i) by reason of the Employee's
pregnancy, (ii) by reason of the birth of the Employee's child, (iii) by reason
of the placement of a child with the Employee in connection with the Employee's
adoption of the child, or (iv) for purposes of caring for such child for a
period beginning immediately after such birth or placement, the Employee shall
be credited with the Hours of Service which would normally have been credited
but for such absence, up to a maximum of 501 Hours of Service.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee responsible for the administration of
this Plan in accordance with Section 12.
"Company" means Brookline Bancorp, Inc., the stock holding company of
Bank.
"Disability" means only a disability which renders the Participant
totally unable, as a result of bodily or mental disease or injury, to perform
any duties for an Employer for which he is reasonably fitted, which disability
is expected to be permanent or of long and indefinite duration. However, this
term shall not include any disability directly or indirectly resulting from or
related to habitual drunkenness or addiction to narcotics, a criminal act or
attempt, service in the armed forces of any country, an act of war, declared or
undeclared, any injury or disease occurring while compensation to the
Participant is suspended, or any injury which is intentionally self-inflicted.
Further, this term shall apply only if (i) the Participant is sufficiently
disabled to qualify for the payment of disability benefits under the federal
Social Security Act or Veterans Disability Act, or (ii) the Participant's
disability is certified by a physician selected by the Committee. Unless the
Participant is sufficiently disabled to qualify for disability benefits under
the federal Social Security Act or Veterans Disability Act, the Committee may
require the Participant to be appropriately examined from time to time by one or
more physicians chosen by the Committee, and no Participant who refuses to be
examined shall be treated as having a Disability. In any event, the Committee's
good faith decision as to whether a Participant's Service has been terminated by
Disability shall be final and conclusive.
"Early Retirement" means retirement on or after a Participant's
attainment of age 55 and the completion of ten years of Service for an Employer.
If the Participant separates from Service before
-2-
<PAGE>
satisfying the age requirement, but has satisfied the Service requirement, the
Participant will be entitled to elect early retirement upon satisfaction of the
age requirement.
"Effective Date" means November 1, 1997.
"Employee" means any individual who is or has been employed or
self-employed by an Employer. "Employee" shall not include an individual
employed by a leasing organization who, pursuant to an agreement between an
Employer and the leasing organization, has performed services for the Employer.
"Employer" means the Bank or any affiliate within the purview of
section 414(b), (c) or (m) and 415(h) of the Code, any other corporation,
partnership, or proprietorship which adopts this Plan with the Bank's consent
pursuant to Section 13.1, and any entity which succeeds to the business of any
Employer and adopts the Plan pursuant to Section 13.2.
"Entry Date" means the Effective Date of the Plan and each November 1
and May 1 of each Plan Year after the Effective Date.
"ERISA" means the Employee Retirement Income Security Act of 1974 (P.L.
93-406, as amended).
"415 Compensation"
(a) Shall mean wages, as defined in Code Section 3401(a) for
purposes of income tax withholding at the source.
(b) For Plan Years beginning after December 31, 1997, any
elective deferral as defined in Code Section 402(g)(3) (any
Employer contributions made on behalf of a Participant to the
extent not includible in gross income and any Employer
contributions to purchase an annuity contract under Code
Section 403(b) under a salary reduction agreement) and any
amount which is contributed or deferred by the Employer at the
election of the Participant and which is not includible in
gross income of the Participant by reason of Code Section 125
(Cafeteria Plan) shall also be included in the definition of
415 Compensation.
(c) 415 Compensation in excess of $160,000 (as indexed) shall
be disregarded for all Participants. For purposes of this
sub-section, the $160,000 limit shall be referred to as
the"applicable limit" for the Plan Year in question. The
$160,000 limit shall be adjusted for increases in the cost of
living in accordance with Section 401(a)(17)(B) of the Code,
effective for the Plan Year which begins within the applicable
calendar year. For purposes of the applicable limit, 415
Compensation shall be prorated over short Plan Years.
"Highly Paid Employee" for any Plan Year means an Employee who, during
either of that or the immediately preceding Plan Year was at any time a five
percent owner of the Employer (as defined in Code Section 416(i)(1)) or, for the
immediately preceding Plan Year, had 415 Compensation exceeding $80,000 and was
among the most highly compensated one-fifth of all Employees. For this purpose:
-3-
<PAGE>
(a) "415 Compensation" shall include any amount which is
excludable from the Employee's gross income for tax purposes pursuant
to Sections 125, 402(a)(8), 402(h)(1)(B), or 403(b) of the Code.
(b) The number of Employees in "the most highly compensated
one-fifth of all Employees" shall be determined by taking into account
all individuals working for all related Employer entities described in
the definition of "Service", but excluding any individual who has not
completed six months of Service, who normally works fewer than 17-1/2
hours per week or in fewer than six months per year, who has not
reached age 21, whose employment is covered by a collective bargaining
agreement, or who is a nonresident alien who receives no earned income
from United States sources.
"Hours of Service" means hours to be credited to an Employee under the
following rules:
(a) Each hour for which an Employee is paid or is entitled to
be paid for services to an Employer is an Hour of Service.
(b) Each hour for which an Employee is directly or indirectly
paid or is entitled to be paid for a period of vacation, holidays,
illness, disability, lay-off, jury duty, temporary military duty, or
leave of absence is an Hour of Service. However, except as otherwise
specifically provided, no more than 501 Hours of Service shall be
credited for any single continuous period which an Employee performs no
duties. No more than 501 Hours of Service will be credited under this
paragraph for any single continuous period (whether or not such period
occurs in a single computation period). Further, no Hours of Service
shall be credited on account of payments made solely under a plan
maintained to comply with worker's compensation, unemployment
compensation, or disability insurance laws, or to reimburse an Employee
for medical expenses.
(c) Each hour for which back pay (ignoring any mitigation of
damages) is either awarded or agreed to by an Employer is an Hour of
Service. However, no more than 501 Hours of Service shall be credited
for any single continuous period during which an Employee would not
have performed any duties. The same Hours of Service will not be
credited both under paragraph (a) or (b) as the case may be, and under
this paragraph (c). These hours will be credited to the employee for
the computation period or periods to which the award or agreement
pertains rather than the computation period in which the award
agreement or payment is made.
(d) Hours of Service shall be credited in any one period only
under one of the foregoing paragraphs (a), (b) and (c); an Employee may
not get double credit for the same period.
(e) If an Employer finds it impractical to count the actual
Hours of Service for any class or group of non-hourly Employees, each
Employee in that class or group shall be credited with 45 Hours of
Service for each weekly pay period in which he has at least one Hour of
Service. However, an Employee shall be credited only for his normal
working hours during a paid absence.
(f) Hours of Service to be credited on account of a payment to
an Employee (including back pay) shall be recorded in the period of
Service for which the payment was made. If the period overlaps two or
more Plan Years, the Hours of Service credit shall be allocated in
-4-
<PAGE>
proportion to the respective portions of the period included in the
several Plan Years. However, in the case of periods of 31 days or less,
the Administrator may apply a uniform policy of crediting the Hours of
Service to either the first Plan Year or the second.
(g) In all respects an Employee's Hours of Service shall be
counted as required by Section 2530.200b-2(b) and (c) of the Department
of Labor's regulations under Title I of ERISA.
"Investment Fund" means that portion of the Trust Fund consisting of
assets other than Stock. Notwithstanding the above, assets from the Investment
Fund may be used to purchase Stock in the open market or otherwise, or used to
pay on the Stock Obligation, and shares so purchased will be allocated to a
Participant's Stock Fund.
"Normal Retirement" means retirement on or after a Participant's 65th
birthday.
"Normal Retirement Date" means the date on which a Participant attains
age 65.
"Participant" means any Employee who is participating in the Plan, or
who has previously participated in the Plan and still has a balance credited to
his Account.
"Plan Year" Each period of 12 consecutive months beginning on November
1 and ending on October 31.
"Recognized Absence" means a period for which --
(a) an Employer grants an Employee a leave of absence for a
limited period, but only if an Employer grants such leave on a
nondiscriminatory basis; or
(b) an Employee is temporarily laid off by an Employer
because of a change in business conditions; or
(c) an Employee is on active military duty, but only to the
extent that his employment rights are protected by the Military
Selective Service Act of 1967 (38 U.S.C. Sec. 2021).
"Service" means an Employee's period(s) of employment or
self-employment with an Employer, excluding for initial eligibility purposes any
period in which the individual was a nonresident alien and did not receive from
an Employer any earned income which constituted income from sources within the
United States. An Employee's Service shall include up to four (4) years of
service with a predecessor employer within the meaning of Section 414(a) of the
Code. An Employee's Service shall also include any service with an entity which
is not an Employer, but only either (i) for a period after 1975 in which the
other entity is a member of a controlled group of corporations or is under
common control with other trades and businesses within the meaning of Section
414(b) or 414(c) of the Code, and a member of the controlled group or one of the
trades and businesses is an Employer, (ii) for a period after 1979 in which the
other entity is a member of an affiliated service group within the meaning of
Section 414(m) of the Code, and a member of the affiliated service group is an
Employer, or (iii) all employers aggregated with the Employer under Section
414(o) of the Code (but not until the Proposed Regulations under Section 414(o)
become effective). Notwithstanding any provision of this Plan to the contrary,
credit for Service with
-5-
<PAGE>
respect to qualified miliary service shall be provided in accordance with
Section 414(u) of the Internal Revenue Code.
"Spouse" means the individual, if any, to whom a Participant is
lawfully married on the date benefit payments to the Participant are to begin,
or on the date of the Participant's death, if earlier. A former spouse shall be
treated as the Spouse or surviving Spouse to the extent provided under a
qualified domestic relations order as described in section 414(p) of the Code.
"Stock" means shares of the Company's voting common stock or preferred
stock meeting the requirements of Section 409(e)(3) of the Code issued by an
Employer which is a member of the same controlled group of corporations within
the meaning of Code Section 414(b).
"Stock Fund" means that portion of the Trust Fund consisting of Stock.
"Stock Obligation" means an indebtedness arising from any extension of
credit to the Plan or the Trust which satisfies the requirements set forth in
Section 6.3 and which was obtained for any or all of the following purposes:
(i) to acquire qualifying employer securities as defined
in Treasury Regulations ss. 54.4975-12
(ii) to repay such Stock Obligation; or
(iii) to repay a prior exempt loan.
"Trust" or "Trust Fund" means the trust fund created under this Plan.
"Trust Agreement" means the agreement between the Bank and the Trustee
concerning the Trust Fund. If any assets of the Trust Fund are held in a
co-mingled trust fund with assets of other qualified retirement plans, "Trust
Agreement" shall be deemed to include the trust agreement governing that
co-mingled trust fund. With respect to the allocation of investment
responsibility for the assets of the Trust Fund, the provisions of Article II of
the Trust Agreement are incorporated herein by reference.
"Trustee" means one or more corporate persons or individuals selected
from time to time by the Bank to serve as trustee or co-trustees of the Trust
Fund.
"Unallocated Stock Fund" means that portion of the Stock Fund
consisting of the Plan's holding of Stock which have been acquired in exchange
for one or more Stock obligations and which have not yet been allocated to the
Participant's Accounts in accordance with Section 4.2
"Valuation Date" means the last day of the Plan Year and each other
date as of which the Committee shall determine the investment experience of the
Investment Fund and adjust the Participants' Accounts accordingly.
"Valuation Period" means the period following a Valuation Date and
ending with the next Valuation Date.
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"Vesting Year" means a unit of Service credited to a Participant
pursuant to Section 9.2 for purposes of determining his vested interest in his
Account.
Section 3. Eligibility for Participation.
3.1 Initial Eligibility. An Employee shall enter the Plan as of the
Entry Date coincident with or next following the later of the following dates:
(a) the last day of the Employee's first Eligibility Year, and
(b) the Employee's 21st birthday. However, if an Employee is
not in active Service with an Employer on the date he would otherwise
first enter the Plan, his entry shall be deferred until the next day he
is in Service.
3.2 Definition of Eligibility Year. An "Eligibility Year" means an
applicable eligibility period (as defined below) in which the Employee has
completed 1,000 Hours of Service for the Employer. For this purpose:
(a) an Employee's first "eligibility period" is the
12-consecutive month period beginning on the first day on which he has
an Hour of Service, and
(b) his subsequent eligibility periods will be 12-consecutive
month periods beginning on each November 1 after that first day of
Service.
3.3 Terminated Employees. No Employee shall have any interest or rights
under this Plan if he is never in active Service with an Employer on or after
the Effective Date.
3.4 Certain Employees Ineligible. No Employee shall participate in the
Plan while his Service is covered by a collective bargaining agreement between
an Employer and the Employee's collective bargaining representative if (i)
retirement benefits have been the subject of good faith bargaining between the
Employer and the representative and (ii) the collective bargaining agreement
does not provide for the Employee's participation in the Plan. No Employee who
is employed by the Employer pursuant to an agreement between the Employer and a
leasing organization shall be eligible to participate in the Plan.
3.5 Participation and Reparticipation. Subject to the satisfaction of
the foregoing requirements, an Employee shall participate in the Plan during
each period of his Service from the date on which he first becomes eligible
until his termination. For this purpose, an Employee who returns before five (5)
consecutive Breaks in Service who previously satisfied the initial eligibility
requirements or who returns after 5 consecutive one year Breaks in Service with
a vested Account balance in the Plan shall re-enter the Plan as of the date of
his return to Service with an Employer.
3.6 Omission of Eligible Employee. If, in any Plan Year, any Employee
who should be included as a Participant in the Plan is erroneously omitted and
discovery of such omission is not made until after a contribution by his
Employer for the year has been made, the Employer shall make a
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subsequent contribution with respect to the omitted Employee in the amount which
the said Employer would have contributed shall be made regardless of whether or
not it is deductible in whole or in part in any taxable year under applicable
provisions of the Code.
3.7 Inclusion of Ineligible Employee. If, in any Plan Year, any person
who should not have been included as a Participant in the Plan is erroneously
included and discovery of such incorrect inclusion is not made until after a
contribution for the year has been made, the Employer shall not be entitled to
recover the contribution made with respect to the ineligible person regardless
of whether or not a deduction is allowable with respect to the ineligible person
shall constitute a forfeiture for the Plan Year in which the discovery is made.
Section 4. Contributions and Credits.
4.1 Discretionary Contributions. The Employer shall from time to time
contribute, with respect to a Plan Year, such amounts as it may determine from
time to time. The Employer shall have no obligation to contribute any amount
under this Plan except as so determined in its sole discretion. The Employer's
contributions and available forfeitures for a Plan Year shall be credited as of
the last day of the year to the Accounts of the Active Participants in
proportion to their amounts of Cash Compensation earned while a Participant in
the Plan. Notwithstanding any other provision of the Plan to the contrary,
contributions and benefits will be provided in accordance with Section 414(u) of
the Code, relating to veteran's reemployment rights.
4.2 Contributions for Stock Obligations. If the Trustee, upon
instructions from the Committee, incurs any Stock Obligation upon the purchase
of Stock, the Employer may contribute for each Plan Year an amount sufficient to
cover all payments of principal and interest as they come due under the terms of
the Stock Obligation. If there is more than one Stock Obligation, the Employer
shall designate the one to which any contribution is to be applied. Investment
earnings realized on Employer contributions and any dividends paid by the
Employer on Stock held in the Unallocated Stock Account, shall be applied to the
Stock Obligation related to that Stock, subject to Section 7.2.
In each Plan Year in which Employer contributions, earnings on
contributions, or dividends on unallocated Stock are used as payments under a
Stock Obligation, a certain number of shares of the Stock acquired with that
Stock Obligation which is then held in the Unallocated Stock Fund shall be
released for allocation among the Participants. The number of shares released
shall bear the same ratio to the total number of those shares then held in the
Unallocated Stock Fund (prior to the release) as (i) the principal and interest
payments made on the Stock Obligation in the current Plan Year bears to (ii) the
sum of (i) above, and the remaining principal and interest payments required (or
projected to be required on the basis of the interest rate in effect at the end
of the Plan Year) to satisfy the Stock Obligation.
At the direction of the Committee, the current and projected payments
of interest under a Stock Obligation may be ignored in calculating the number of
shares to be released in each year if (i) the Stock Obligation provides for
annual payments of principal and interest at a cumulative rate that is not less
rapid at any time than level annual payments of such amounts for 10 years, (ii)
the interest included in any payment is ignored only to the extent that it would
be determined to be interest under standard loan amortization tables, and (iii)
the term of the Stock Obligation, by reason of renewal, extension, or
refinancing, has not exceeded 10 years from the original acquisition of the
Stock.
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4.3 Definitions Related to Contributions. For the purposes of this
Plan, the following terms have the meanings specified:
"Active Participant" means a Participant who has satisfied the
eligibility requirements under Section 3 and who has at least 1000 Hours of
Service during the current Plan Year. However, a Participant shall not qualify
as an Active Participant unless (i) he is in active Service with an Employer as
of the last day of the Plan Year, or (ii) he is on a Recognized Absence as of
that date, or (iii) his Service terminated during the Plan Year by reason of
Disability, death, Early or Normal Retirement.
"Cash Compensation" means a Participant's 415 Compensation as defined
in Section 2 of the Plan, and shall also include amounts contributed under a
salary reduction agreement pursuant to Section 401(k) or Section 125 of the
Code.
In the event a Plan Year is a period of less than 12 months for any
reason, then Cash Compensation for the short period shall not exceed the pro
rata portion of this limit created by multiplying a fraction which is the number
of months in the short period divided by twelve times the annual compensation
limit.
4.4 Conditions as to Contributions. Employers' contributions shall in
all events be subject to the limitations set forth in Section 5. Contributions
may be made in the form of cash, or securities and other property to the extent
permissible under ERISA, including Stock, and shall be held by the Trustee in
accordance with the Trust Agreement. In addition to the provisions of Section
13.3 for the return of an Employer's contributions in connection with a failure
of the Plan to qualify initially under the Code, any amount contributed by an
Employer due to a good faith mistake of fact, or based upon a good faith but
erroneous determination of its deductibility under Section 404 of the Code,
shall be returned to the Employer within one year after the date on which the
contribution was originally made, or within one year after its nondeductibility
has been finally determined. However, the amount to be returned shall be reduced
to take account of any adverse investment experience within the Trust Fund in
order that the balance credited to each Participant's Account is not less that
it would have been if the contribution had never been made.
4.5 Transfers. This Plan does not accept direct or indirect transfers,
including roll-over contributions from other tax-qualified plans.
Section 5. Limitations on Contributions and Allocations.
5.1 Limitation on Annual Additions. Notwithstanding anything herein to
the contrary, allocation of Employer contributions for any Plan Year shall be
subject to the following:
5.1-1 If allocation of Employer contributions in accordance
with Section 4.1 will result in an allocation of more than one-third
the total contributions for a Plan Year to the Accounts of Highly Paid
Employees, then allocation of such amount shall be adjusted so that
such excess will not occur.
5.1-2 After adjustment, if any, required by the preceding
paragraph, the annual additions during any Plan Year to any
Participant's Account under this and any other defined contribution
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plans maintained by the Employer or an affiliate (within the purview of
Section 414(b), (c) and (m) and Section 415(h) of the Code, which
affiliate shall be deemed the Employer for this purpose) shall not
exceed the lesser of $30,000 or "25 percent of the Participant's Total
Compensation for such limitation year." In the event that annual
additions exceed the aforesaid limitations, they shall be reduced in
the following priority:
(i) If the Participant is covered by the Plan at the end of
the Plan Year, any excess amount at the end of the Plan Year that
cannot be allocated to the Participant's Account shall be used to
reduce the Employer contribution for such Participant in the next
limitation year and any succeeding limitation years if necessary.
(ii) If the Participant is not covered by the Plan at the end
of the Plan Year, the excess amount will be held unallocated in a
suspense account. The suspense account will be applied to reduce future
Employer contributions for all remaining Participants in the next
limitation year and each succeeding limitation year if necessary.
(iii) If a suspense account is in existence at any time during
a limitation year, it will not participate in any allocation of
investment gains and losses. All amounts held in suspense accounts must
be allocated to Participant's Accounts before any contributions may be
made to the Plan for the limitation year.
(iv) If a suspense account exists at the time of Plan
termination, amounts held in the suspense account that cannot be
allocated shall revert to the Employer.
5.1-3 For purposes of this Section 5.1 and the following
Section 5.2, the "annual addition" to a Participant's accounts means
the sum of (i) Employer contributions, (ii) Employee contributions, if
any, and (iii) forfeitures. Annual additions to a defined contribution
plan also include amounts allocated, after March 31, 1984, to an
individual medical account, as defined in Section 415(l)(2) of the
Internal Revenue Code, which is part of a pension or annuity plan
maintained by the Employer, amounts derived from contributions paid or
accrued after December 31, 1985, in taxable years ending after such
date, which are attributable to post-retirement medical benefits
allocated to the separate account of a Key Employee under a welfare
benefit fund, as defined in Section 419A(d) of the Internal Revenue
Code, maintained by the Employer. For these purposes, annual additions
to a defined contribution plan shall not include the allocation of the
excess amounts remaining in the Unallocated Stock Fund subsequent to a
sale of stock from such fund in accordance with a transaction described
in Section 8.1 of the Plan. The $30,000 limitations referred to shall,
for each limitation year ending after 1988, be automatically adjusted
to the new dollar limitations determined by the Commissioner of
Internal Revenue for the calendar year beginning in that limitation
year.
5.1-4 Notwithstanding the foregoing, if no more than one-third
of the Employer contributions to the Plan for a year which are
deductible under Section 404(a)(9) of the Code are allocated to Highly
Paid Employees (within the meaning of Section 414(q) of the Internal
Revenue Code), the limitations imposed herein shall not apply to:
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(i) forfeitures of Employer securities (within the meaning of
Section 409 of the Code) under the Plan if such securities were
acquired with the proceeds of a loan described in Section 404(a)(9)(A)
of the Code), or
(ii) Employer contributions to the Plan which are deductible
under Section 404(a)(9)(B) and charged against a Participant's Account.
5.1-5 If the Employer contributes amounts, on behalf of
Employees covered by this Plan, to other "defined contribution plans"
as defined in Section 3(34) of ERISA, the limitation on annual
additions provided in this Section shall be applied to annual additions
in the aggregate to this Plan and to such other plans. Reduction of
annual additions, where required, shall be accomplished first by
reductions under such other plan pursuant to the directions of the
named fiduciary for administration of such other plans or under
priorities, if any, established under the terms of such other plans and
then by allocating any remaining excess for this Plan in the manner and
priority set out above with respect to this Plan.
5.1-6 A limitation year shall mean each 12 consecutive month
period beginning each October 1.
5.2 Coordinated Limitation With Other Plans. Aside from the limitation
prescribed by Section 5.1 with respect to the annual addition to a Participant's
Accounts for any single limitation year, if a Participant has ever participated
in one or more defined benefit plans maintained by an Employer or an affiliate,
then the accrued benefit shall be limited so that the sum of his defined plan
fraction and his defined contribution plan fraction does not exceed one. For
this purpose:
5.2-1 A Participant's defined contribution plan fraction with
respect to a Plan Year shall be a fraction, (i) the numerator of which
is the sum of the annual additions to his Accounts through the current
year, and (ii) the denominator of which is the sum of the lesser of the
following amounts -A- and -B- determined for the current limitation
year and each prior limitation year of Service with an Employer: -A- is
1.25 times the dollar limit in effect for the year under Section
415(c)(1)(A) of the Code, or 1.0 times such dollar limitation if the
Plan is top-heavy, and -B- is 35 percent of the Participant's 415
Compensation for such year. Further, if the Participant participated in
any related defined contribution plan in any years beginning before
1976, any-excess of the sum of the actual annual additions to the
Participant's Accounts for those years over the maximum annual
additions which could have been made in accordance with Section 5.1
shall be ignored, and voluntary contributions by the Participant during
those years shall be taken into account as to each such year only to
the extent that his average annual voluntary contribution in those
years exceeded 10 percent of his average annual 415 Compensation in
those years.
5.2-2 A Participant's defined benefit plan fraction with
respect to a limitation year shall be a fraction, (i) the numerator of
which is his projected annual benefit payable at normal retirement
under the Employers' defined benefit plans, and (ii) the denominator of
which is the lesser of (a) 1.25 times $90,000, or 1.0 times such dollar
limitation if the Plan is top-heavy, and (b) 1.4 times the
Participant's average 415 Compensation during his highest-paid three
consecutive limitation years.
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5.3 Effect of Limitations. The Committee shall take whatever action may
be necessary from time to time to assure compliance with the limitations set
forth in Section 5.1 and 5.2. Specifically, the Committee shall see that each
Employer restrict its contributions for any Plan Year to an amount which, taking
into account the amount of available forfeitures, may be completely allocated to
the Participants consistent with those limitations. Where the limitations would
otherwise be exceeded by any Participant, further allocations to the Participant
shall be curtailed to the extent necessary to satisfy the limitations. Where an
excessive amount is contributed on account of a mistake as to one or more
Participants' compensation, or there is an amount of forfeitures which may not
be credited in the Plan Year in which it becomes available, the amount shall be
corrected in accordance with Section 5.1-2 of the Plan.
5.4 Limitations as to Certain Participants. Aside from the limitations
set forth in Section 5.1 and 5.2, if the Plan acquires any Stock in a
transaction as to which a selling shareholder or the estate of a deceased
shareholder is claiming the benefit of Section 1042 of the Code, the Committee
shall see that none of such Stock, and no other assets in lieu of such Stock,
are allocated to the Accounts of certain Participants in order to comply with
Section 409(n) of the Code.
This restriction shall apply at all times to a Participant who owns
(taking into account the attribution rules under Section 318(a) of the Code,
without regard to the exception for employee plan trusts in Section
318(a)(2)(B)(i) more than 25 percent of any class of stock of a corporation
which issued the Stock acquired by the Plan, or another corporation within the
same controlled group, as defined in Section 409(l)(4) of the Code (any such
class of stock hereafter called a "Related Class"). For this purpose, a
Participant who owns more than 25 percent of any Related Class at any time
within the one year preceding the Plan's purchase of the Stock shall be subject
to the restriction as to all allocations of the Stock, but any other Participant
shall be subject to the restriction only as to allocations which occur at a time
when he owns more than 25 percent of any Related Class.
Further, this restriction shall apply to the selling shareholder
claiming the benefit of Section 1042 and any other Participant who is related to
such a shareholder within the meaning of Section 267(b) of the Code, during the
period beginning on the date of sale and ending on the later of (1) the date
that is ten years after the date of sale, or (2) the date of the Plan allocation
attributable to the final payment of acquisition indebtedness incurred in
connection with the sale.
This restriction shall not apply to any Participant who is a lineal
descendant of a selling shareholder if the aggregate amounts allocated under the
Plan for the benefit of all such descendants do not exceed five percent of the
Stock acquired from the shareholder.
Section 6. Trust Fund and Its Investment.
6.1 Creation of Trust Fund. All amounts received under the Plan from
Employers and investments shall be held as the Trust Fund pursuant to the terms
of this Plan and of the Trust Agreement between the Bank and the Trustee. The
benefits described in this Plan shall be payable only from the assets of the
Trust Fund, and none of the Bank, any other Employer, its board of directors or
trustees, its stockholders, its officers, its employees, the Committee, and the
Trustee shall be liable for payment of any benefit under this Plan except from
the Trust Fund.
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6.2 Stock Fund and Investment Fund. The Trust Fund held by the Trustee
shall be divided into the Stock Fund, consisting entirely of Stock, and the
Investment Fund, consisting of all assets of the Trust other than Stock. The
Trustee shall have no investment responsibility for the Stock Fund, but shall
accept any Employer contributions made in the form of Stock, and shall acquire,
sell, exchange, distribute, and otherwise deal with and dispose of Stock in
accordance with the instructions of the Committee. The Trustee shall have full
responsibility for the investment of the Investment Fund, except to the extent
such responsibility may be delegated from time to time to one or more investment
managers pursuant to Section 2.3 of the Trust Agreement, or to the extent the
Committee directs the Trustee to purchase Stock with the assets in the
Investment Fund.
6.3 Acquisition of Stock. From time to time the Committee may, in its
sole discretion, direct the Trustee to acquire Stock from the issuing Employer
or from shareholders, including shareholders who are or have been Employees,
Participants, or fiduciaries with respect to the Plan. The Trustee shall pay for
such Stock no more than its fair market value, which shall be determined
conclusively by the Committee pursuant to Section 12.4. The Committee may direct
the Trustee to finance the acquisition of Stock by incurring or assuming
indebtedness to the seller or another party which indebtedness shall be called a
"Stock Obligation". The term "Stock Obligation" shall refer to a loan made to
the Plan by a disqualified person within the meaning of Section 4975(e)(2) of
the Code, or a loan to the Plan which is guaranteed by a disqualified person. A
Stock Obligation includes a direct loan of cash, a purchase-money transaction,
and an assumption of an obligation of a tax-qualified employee stock ownership
plan under Section 4975(e)(7) of the Code ("ESOP"). For these purposes, the term
"guarantee" shall include an unsecured guarantee and the use of assets of a
disqualified person as collateral for a loan, even though the use of assets may
not be a guarantee under applicable state law. An amendment of a Stock
Obligation in order to qualify as an "exempt loan" is not a refinancing of the
Stock Obligation or the making of another Stock Obligation. The term "exempt
loan" refers to a loan that satisfies the provisions of this paragraph. A
"non-exempt loan" fails to satisfy this paragraph. Any Stock Obligation shall be
subject to the following conditions and limitations:
6.3-1 A Stock Obligation shall be for a specific term, shall
not be payable on demand except in the event of default, and shall bear
a reasonable rate of interest.
6.3-2 A Stock Obligation may, but need not, be secured by a
collateral pledge of either the Stock acquired in exchange for the
Stock Obligation, or the Stock previously pledged in connection with a
prior Stock Obligation which is being repaid with the proceeds of the
current Stock Obligation. No other assets of the Plan and Trust may be
used as collateral for a Stock Obligation, and no creditor under a
Stock Obligation shall have any right or recourse to any Plan and Trust
assets other than Stock remaining subject to a collateral pledge.
6.3-3 Any pledge of Stock to secure a Stock Obligation must
provide for the release of pledged Stock in connection with payments on
the Stock obligations in the ratio prescribed in Section 4.2.
6.3-4 Repayments of principal and interest on any Stock
Obligation shall be made by the Trustee only from Employer cash
contributions designated for such payments, from earnings on such
contributions, and from cash dividends received on Stock, in the last
case, however, subject to the further requirements of Section 7.2.
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6.3-5 In the event of default of a Stock Obligation, the value
of Plan assets transferred in satisfaction of the Stock Obligation must
not exceed the amount of the default. If the lender is a disqualified
person within the meaning of Section 4975 of the Code, a Stock
Obligation must provide for a transfer of Plan assets upon default only
upon and to the extent of the failure of the Plan to meet the payment
schedule of said Stock Obligation. For purposes of this paragraph, the
making of a guarantee does not make a person a lender."
6.4 Participants' Option to Diversify. The Committee shall provide for
a procedure under which each Participant may, during the qualified election
period, elect to "diversify" a portion of the Employer Stock allocated to his
Account, as provided in Section 401(a)(28)(B) of the Code. An election to
diversity must be made on the prescribed form and filed with the Committee
within the period specified herein. For each of the first five (5) Plan years in
the qualified election period, the Participant may elect to diversify an amount
which does not exceed 25% of the number of shares allocated to his Account since
the inception of the Plan, less all shares with respect to which an election
under this Section has already been made. For the last year of the qualified
election period, the Participant may elect to have up to 50 percent of the value
of his Account committed to other investments, less all shares with respect to
which an election under this Section has already been made. The term "qualified
election period" shall mean the six (6) Plan Year period beginning with the
first Plan Year in which a Participant has both attained age 55 and completed 10
years of participation in the Plan. A Participant's election to diversify his
Account may be made within each year of the qualified election period and shall
continue for the 90-day period immediately following the last day of each year
in the qualified election period. Once a Participant makes such election, the
Plan must complete diversification in accordance with such election within 90
days after the end of the period during which the election could be made for the
Plan Year. In the discretion of the Committee, the Plan may satisfy the
diversification requirement by any of the following methods:
6.4-1 The Plan may distribute all or part of the amount
subject to the diversification election.
6.4-2 The Plan may offer the Participant at least three other
distinct investment options, if available under the Plan. The other
investment options shall satisfy the requirements of Regulations under
Section 404(c) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA").
6.4-3 The Plan may transfer the portion of the Participant's
Account subject to the diversification election to another qualified
defined contribution plan of the Employer that offers at least three
investment options satisfying the requirements of the Regulations under
Section 404(c) of ERISA.
Section 7. Voting Rights and Dividends on Stock.
7.1 Voting and Tendering of Stock. The Trustee generally shall vote all
shares of Stock held under the Plan in accordance with the written instructions
of the Committee. However, if any Employer has registration-type class of
securities within the meaning of Section 409(e)(4) of the Code, or if a matter
submitted to the holders of the Stock involves a merger, consolidation,
recapitalization, reclassification, liquidation, dissolution, or sale of
substantially all assets of an entity, then (i) the shares of Stock which have
been allocated to Participants' Accounts shall be voted by the Trustee in
accordance with the
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Participants' written instructions, and (ii) the Trustee shall vote any
unallocated Stock and allocated Stock for which it has received no voting
instructions in the same proportions as it votes the allocated Stock for which
it has received instructions from Participants; provided, however, that if an
exempt loan, as defined in Section 4975(d) of the Code, is outstanding and the
Plan is in default on such exempt loan, as default is defined in the loan
documents, then to the extent that such loan documents require the lender to
exercise voting rights with respect to the unallocated shares, the loan
documents will prevail. In the event no shares of Stock have been allocated to
Participants' Accounts at the time Stock is to be voted and any exempt loan
which may be outstanding is not in default, each Participant shall be deemed to
have one share of Stock allocated to his or her Account for the sole purpose of
providing the Trustee with voting instructions.
Notwithstanding any provision hereunder to the contrary, all
unallocated shares of Stock must be voted by the Trustee in a manner determined
by the Trustee to be for the exclusive benefit of the Participants and
Beneficiaries. Whenever such voting rights are to be exercised, the Employers
shall provide the Trustee, in a timely manner, with the same notices and other
materials as are provided to other holders of the Stock, which the Trustee shall
distribute to the Participants. The Participants shall be provided with adequate
opportunity to deliver their instructions to the Trustee regarding the voting of
Stock allocated to their Accounts. The instructions of the Participants' with
respect to the voting of allocated shares hereunder shall be confidential.
7.1-1 In the event of a tender offer, Stock shall be tendered
by the Trustee in the same manner as set forth above with respect to
the voting of Stock. Notwithstanding any provision hereunder to the
contrary, Stock must be tendered by the Trustee in a manner determined
by the Trustee to be for the exclusive benefit of the Participants and
Beneficiaries.
7.2 Dividends on Stock. Dividends on Stock which are received by the
Trustee in the form of additional Stock shall be retained in the Stock Fund, and
shall be allocated among the Participant's Accounts and the Unallocated Stock
Fund in accordance with their holdings of the Stock on which the dividends have
been paid. Dividends on Stock credited to Participants' Accounts which are
received by the Trustee in the form of cash shall, at the direction of the
Employer paying the dividends, either (i) be credited to the Accounts in
accordance with Section 8.3 and invested as part of the Investment Fund, (ii) be
distributed immediately to the Participants in proportion with the Participants'
Stock Fund Account balance (iii) be distributed to the Participants within 90
days of the close of the Plan Year in which paid in proportion with the
Participants' Stock Fund Account balance or (iv) be used to make payments on the
Stock Obligation. If dividends on Stock allocated to a Participant's Account are
used to repay the Stock Obligation, Stock with a fair market value equal to the
dividends so used must be allocated to such Participant's Account in lieu of the
dividends. Dividends on Stock held in the Unallocated Stock Fund which are
received by the Trustee in the form of cash shall be allocated to Participants'
Investment Fund Accounts (pro rata based on the Participant's Account balance in
relation to all Participants' Account balances) and shall be applied as soon as
practicable to payments of principal and interest under the Stock Obligation
incurred with the purchase of the Stock.
Section 8. Adjustments to Accounts.
8.1 Adjustments for Transactions. An Employer contribution pursuant to
Section 4.1 shall be credited to the Participants' Accounts as of the last day
of the Plan Year for which it is contributed, in accordance with Section 4.1.
Stock released from the Unallocated Stock Fund upon the Trust's repayment
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of a Stock Obligation pursuant to Section 4.2 shall be credited to the
Participants' Accounts as of the last day of the Plan Year in which the
repayment occurred, pro rata based on the cash applied from such Participant's
Account relative to the cash applied from all Participants' Accounts. Any excess
amounts remaining from the use of proceeds of a sale of Stock from the
Unallocated Stock Fund to repay a Stock Obligation shall be allocated as
earnings of the Plan as of the last day of the Plan Year in which the repayment
occurred among the Participants' Accounts in proportion to the opening balance
in each Account. Any benefit which is paid to a Participant or Beneficiary
pursuant to Section 10 shall be charged to the Participant's Account as of the
first day of the Valuation Period in which it is paid. Any forfeiture or
restoral shall be charged or credited to the Participant's Account as of the
first day of the Valuation Period in which the forfeiture or restoral occurs
pursuant to Section 9.6.
8.2 Valuation of Investment Fund. As of each Valuation Date, the
Trustee shall prepare a balance sheet of the Investment Fund, recording each
asset (including any contribution receivable from an Employer) and liability at
its fair market value. Any liability with respect to short positions or options
and any item of accrued income or expense and unrealized appreciation or
depreciation shall be included; provided, however, that such an item may be
estimated or excluded if it is not readily ascertainable unless estimating or
excluding it would result in a material distortion. The Committee shall then
determine the net gain or loss of the Investment Fund since the preceding
Valuation Date, which shall mean the entire income of the Investment Fund,
including realized and unrealized capital gains and losses, net of any expenses
to be charged to the general Investment Fund and excluding any contributions by
the Employer. The determination of gain or loss shall be consistent with the
balance sheets of the Investment Fund for the current and preceding Valuation
Dates.
8.3 Adjustments for Investment Experience. Any net gain or loss of the
Investment Fund during a Valuation Period, as determined pursuant to Section
8.2, shall be allocated as of the last day of the Valuation Period among the
Participants' Accounts in proportion to the opening balance in each Account, as
adjusted for benefit payments and forfeitures during the Valuation Period,
without regard to whatever Stock may be credited to an Account. Any cash
dividends received on Stock credited to Participant's Accounts shall be
allocated as of the last day of the Valuation Period among the Participants'
Accounts based on the opening balance in each Participant's Stock Fund Account.
Section 9. Vesting of Participants' Interests.
9.1 Deferred Vesting in Accounts. A Participant's vested interest in
his Account shall be based on his Vesting Years in accordance with the following
Table, subject to the balance of this Section 9:
Vesting Percentage of
Years Interest Vested
------- ---------------
Fewer than 3 0%
3 20%
4 40%
5 60%
6 80%
7 100%
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9.2 Computation of Vesting Years. For purposes of this Plan, a "Vesting
Year" means generally a Plan Year in which an Employee has at least 1,000 Hours
of Service, beginning with the first Plan Year in which the Employee has
completed an Hour of Service with the Employer, and including Service with other
employers as provided in the definition of "Service". Notwithstanding the above,
an Employee who was employed by the Bank in mutual form, shall receive credit
for vesting purposes for each continuous period of employment with the mutual
Bank, from each November 1 through October 31, in which such Employee completed
1,000 Hours of Service, not to exceed 3 years of credit for vesting purpose
(such years shall also be referred to as "Vesting Years"). However, a
Participant's Vesting Years shall be computed subject to the following
conditions and qualifications:
9.2-1 A Participant's Vesting Years shall not include any
Service prior to the date on which an Employee attains age 18.
9.2-2 A Participant's vested interest in his Account
accumulated before five (5) consecutive Breaks in Service shall be
determined without regard to any Service after such five consecutive
Breaks in Service. Further, if a Participant has five (5) consecutive
Breaks in Service before his interest in his Account has become vested
to some extent, pre-Break years of Service shall not be required to be
taken into account for purposes of determining his post-Break vested
percentage.
9.2-3 In the case of a Participant who has 5 or more
consecutive 1-year Breaks in Service, the Participant's pre-break
Service will count in vesting of the Employer-derived post-break
accrued benefit only if either:
(i) such Participant has any nonforfeitable interest in
the accrued benefit attributable to Employer
contributions at the time of separation from Service,
or
(ii) upon returning to Service the number of consecutive
1-year Breaks in Service is less than the number of
years of Service.
9.2-4 Unless otherwise specifically excluded, a Participant's
Vesting Years shall include any period of active military duty to the
extent required by the Military Selective Service Act of 1967 (38
U.S.C. Section 2021).
9.2-5 If any amendment changes the vesting schedule, including
an automatic change to or from a top-heavy vesting schedule, any
Participant with three (3) or more Vesting Years may, by filing a
written request with the Employer, elect to have his vested percentage
computed under the vesting schedule in effect prior to the amendment.
The election period must begin not later than the later of sixty (60)
days after the amendment is adopted, the amendment becomes effective,
or the Participant is issued written notice of the amendment by the
Employer or the Committee.
9.3 Full Vesting Upon Certain Events.
9.3-1 Notwithstanding Section 9.1, a Participant's interest in
his Account shall fully vest on the Participant's Normal Retirement Date. The
Participant's interest shall also fully vest in the event that his Service is
terminated by Early Retirement, Disability or by death.
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9.3-2 The Participant's interest in his Account shall also
fully vest in the event of a "Change in Control" of the Bank, or the Company.
For these purposes, "Change in Control" shall mean an event of a nature that;
(i) would be required to be reported in response to Item 1a of the current
report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act'); or (ii)
results in a Change in Control of the Bank or the Company within the meaning of
the Bank Holding Company Act of 1956, as amended, and applicable rules and
regulations promulgated thereunder as in effect at the time of the Change in
Control (collectively, the BHCA"); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (a) any "Person' (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Bank or the Company representing
25% or more of the Bank's or the Company's outstanding securities except for any
securities of the Bank purchased by the Company in connection with the
conversion of the Bank to the stock form and any securities purchased by the
Bank's employee stock ownership plan and trust; or (b) individuals who
constitute the Board on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided, however, that this
subsection (b) shall not apply if the Incumbent Board is replaced by the
appointment by a Federal banking agency of a conservator or receiver for the
Bank and, provided further that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least two-thirds of the
directors comprising the Incumbent Board or whose nomination for election by the
Company's stockholders was approved by the same Nominating Committee serving
under an Incumbent Board, shall be, for purposes of this clause (b), considered
as though he were a member of the Incumbent Board; or (c) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Company; or (d) a proxy statement soliciting proxies
from stockholders of the Company, by someone other than the current management
of the Company, seeking stockholder approval of a plan of reorganization, merger
or consolidation of the Company or Bank or similar transaction with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to such plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Company shall be distributed and the requisite number of proxies approving such
plan of reorganization, merger or consolidation of the Company or Bank are
received and voted in favor of such transactions; or (e) a tender offer is made
for 25% or more of the outstanding securities of the Bank or Company and
shareholders owning beneficially or of record 25% or more of the outstanding
securities of the Bank or Company have tendered or offered to sell their shares
pursuant to such tender offer and such tendered shares have been accepted by the
tender offeror.
9.4 Full Vesting Upon Plan Termination. Notwithstanding Section 9.1, a
Participant's interest in his Account shall fully vest upon termination of this
Plan or upon the permanent and complete discontinuance of contributions by his
Employer. In the event of a partial termination, the interest of each affected
Participant shall fully vest with respect to that part of the Plan which is
terminated.
9.5 Forfeiture, Repayment, and Restoral. If a Participant's Service
terminates before his interest in his Account is fully vested, that portion
which has not vested shall be forfeited if he either (i) receives a distribution
of his entire vested interest pursuant to Section 10.1, or (ii) incurs five (5)
consecutive one year Breaks In Service. If a Participant's Service terminates
prior to having any portion of his Account become vested, such Participant shall
be deemed to have a received a distribution of his vested interest as of the
Valuation Date next following his termination of Service.
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If a Participant who has received his entire vested interest returns to
Service before he has five (5) consecutive Breaks in Service, he may repay to
the Trustee an amount equal to the distribution. The Participant may repay such
amount at any time within five years after he has returned to Service. The
amount shall be credited to his Account at the time it is repaid; an additional
amount equal to that portion of his Account which was previously forfeited shall
be restored to his Account at the same time from other Employees' forfeitures
and, if such forfeitures are insufficient, from a special contribution by his
Employer for that year. A Participant who was deemed to have received a
distribution of his vested interest in the Plan shall have his Account restored
as of the first day on which he performs an Hour of Service after his return.
9.6 Accounting for Forfeitures. If a portion of a Participant's Account
is forfeited, Stock allocated to said Participant's Account shall be forfeited
only after other assets are forfeited. If interests in more than one class of
Stock have been allocated to a Participant's account, the Participant must be
treated as forfeiting the same proportion of each class of Stock. A forfeiture
shall be charged to the Participant's Account as of the first day of the first
Valuation Period in which the forfeiture becomes certain pursuant to Section
9.5. Except as otherwise provided in that Section, a forfeiture shall be added
to the contributions of the terminated Participant's Employer which are to be
credited to other Participants pursuant to Section 4.1 as of the last day of the
Plan Year in which the forfeiture becomes certain.
9.7 Vesting and Nonforfeitability. A Participant's interest in his
Account which has become vested shall be nonforfeitable for any reason.
Section 10. Payment of Benefits.
10.1 Benefits for Participants. For a Participant whose Service ends
for any reason, distribution will be made to or for the benefit of the
Participant or, in the case of the Participant's death, his Beneficiary, by
payment in a lump sum, in accordance with Section 10.2.
If the value of a Participant's vested Account balance is, or has ever
been in excess of, $5,000, then his benefits shall not be paid before his 65th
birthday unless he elects an early payment date in a written election filed with
the Committee. A Participant may modify such an election at any time, provided
any new benefit payment date is at least 30 days after a modified election is
delivered to the Committee, subject to the provisions of Section 10.11 hereof.
10.2 Time for Distribution.
10.2.1 If the Participant and, if applicable, with the consent
of the Participant's spouse, elects the distribution of the Participant's
Account balance in the Plan, distribution shall commence as soon as practicable
after the last day of the Plan Year following the Participant's termination of
Service for any reason, but no later than one year after the close of the Plan
Year:
(i) in which the Participant separates from Service
by reason of Normal Retirement, Disability, or death; or
(ii) which is the fifth Plan Year following the year
in which the Participant resigns or is dismissed, unless he is
reemployed before such date.
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10.2.2 Unless the Participant elects otherwise, the
distribution of the balance of a Participant's Account shall commence not later
than the 60th day after the latest of the close of the Plan Year in which -
(i) the Participant attains the age of 65;
(ii) occurs the tenth anniversary of the year in
which the Participant commenced participation in the Plan; or
(iii) the Participant terminates his Service with the
Employer.
10.2.3 Notwithstanding anything to the contrary, (1) with
respect to a 5-percent owner (as defined in Code Section 416), distribution of a
Participant's Account shall commence (whether or not he remains in the employ of
the Employer) not later than the April 1 of the calendar year next following the
calendar year in which the Participant attains age 70-1/2, and (2) with respect
to all other Participants, payment of a Participant's benefit will commence not
later than April 1 of the calendar year following the calendar year in which the
Participant attains age 70-1/2, or, if later, the year in which the Participant
retires. A Participant's benefit from that portion of his Account committed to
the Investment Fund shall be calculated on the basis of the most recent
Valuation Date before the date of payment.
10.2.4 Distribution of a Participant's Account balance after
his death shall comply with the following requirements:
(i) If a Participant dies before his distributions
have commenced, distribution of his Account to his Beneficiary
shall commence not later than one year after the end of the
Plan Year in which the Participant died, however, if the
Participant's Beneficiary is his surviving Spouse,
distributions may commence on the date on which the
Participant would have attained age 70-1/2. In either case,
distributions shall be completed within five years after the
they commence.
(ii) If a married Participant dies before his benefit
payments begin, then unless he has specifically elected
otherwise the Committee shall cause the balance in his Account
to be paid to his Spouse. No election by a married Participant
of a different Beneficiary shall be valid unless the election
is accompanied by the Spouse's written consent, which (i) must
acknowledge the effect of the election, (ii) must explicitly
provide either that the designated Beneficiary may not
subsequently be changed by the Participant without the
Spouse's further consent, or that it may be changed without
such consent, and (iii) must be witnessed by the Committee,
its representative, or a notary public. (This requirement
shall not apply if the Participant establishes to the
Committee's satisfaction that the Spouse may not be located.)
10.3 Marital Status. The Committee shall from time to time take
whatever steps it deems appropriate to keep informed of each Participant's
marital status. Each Employer shall provide the Committee with the most reliable
information in the Employer's possession regarding its Participants' marital
status, and the Committee may, in its discretion, require a notarized affidavit
from any Participant
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as to his marital status. The Committee, the Plan, the Trustee, and the
Employers shall be fully protected and discharged from any liability to the
extent of any benefit payments made as a result of the Committee's good faith
and reasonable reliance upon information obtained from a Participant and his
Employer as to his marital status.
10.4 Delay in Benefit Determination. If the Committee is unable to
determine the benefits payable to a Participant or Beneficiary on or before the
latest date prescribed for payment pursuant to Section 10.1 or 10.2, the
benefits shall in any event be paid within 60 days after they can first be
determined, with whatever makeup payments may be appropriate in view of the
delay.
10.5 Accounting for Benefit Payments. Any benefit payment shall be
charged to the Participant's Account as of the first day of the Valuation Period
in which the payment is made.
10.6 Options to Receive and Sell Stock. Unless ownership of virtually
all Stock is restricted to active Employees and qualified retirement plans for
the benefit of Employees pursuant to the certificates of incorporation or
by-laws of the Employers issuing Stock, a terminated Participant or the
Beneficiary of a deceased Participant may instruct the Committee to distribute
the Participant's entire vested interest in his Account in the form of Stock. In
that event, the Committee shall apply the Participant's vested interest in the
Investment Fund to purchase sufficient Stock from the Stock Fund or from any
owner of Stock to make the required distribution. In all other cases, the
Participant's vested interest in the Stock Fund shall be distributed in shares
of Stock, and his vested interest in the Investment Fund shall be distributed in
cash.
Any Participant who receives Stock pursuant to Section 10.1, and any
person who has received Stock from the Plan or from such a Participant by reason
of the Participant's death or incompetency, by reason of divorce or separation
from the Participant, or by reason of a rollover contribution described in
Section 402(a)(5) of the Code, shall have the right to require the Employer
which issued the Stock to purchase the Stock for its current fair market value
(hereinafter referred to as the "put right"). The put right shall be exercisable
by written notice to the Committee during the first 60 days after the Stock is
distributed by the Plan, and, if not exercised in that period, during the first
60 days in the following Plan Year after the Committee has communicated to the
Participant its determination as to the Stock's current fair market value.
However, the put right shall not apply to the extent that the Stock, at the time
the put right would otherwise be exercisable, may be sold on an established
market in accordance with federal and state securities laws and regulations.
Similarly, the put option shall not apply with respect to the portion of a
Participant's Account which the Employee elected to have reinvested under Code
Section 401(a)(28)(B). If the put right is exercised, the Trustee may, if so
directed by the Committee in its sole discretion, assume the Employer's rights
and obligations with respect to purchasing the Stock. Notwithstanding anything
herein to the contrary, in the case of a plan established by a Bank (as defined
in Code Section 581), the put option shall not apply if prohibited by a federal
or state law and Participants are entitled to elect their benefits be
distributed in cash.
The Employer or the Trustee, as the case may be, may elect to pay for
the Stock in equal periodic installments, not less frequently than annually,
over a period not longer than five years from the day after the put right is
exercised, with adequate security and interest at a reasonable rate on the
unpaid balance, all such terms to be set forth in a promissory note delivered to
the seller with normal terms as to acceleration upon any uncured default.
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Nothing contained herein shall be deemed to obligate any Employer to
register any Stock under any federal or state securities law or to create or
maintain a public market to facilitate the transfer or disposition of any Stock.
The put right described herein may only be exercised by a person described in
the second preceding paragraph, and may not be transferred with any Stock to any
other person. As to all Stock purchased by the Plan in exchange for any Stock
Obligation, the put right shall be nonterminable. The put right for Stock
acquired through a Stock Obligation shall continue with respect to such Stock
after the Stock Obligation is repaid or the Plan ceases to be an employee stock
ownership plan.
10.7 Restrictions on Disposition of Stock. Except in the case of Stock
which is traded on an established market, a Participant who receives Stock
pursuant to Section 10.1, and any person who has received Stock from the Plan or
from such a Participant by reason of the Participant's death or incompetency, by
reason of divorce or separation from the Participant, or by reason of a rollover
contribution described in Section 402(a)(5) of the Code, shall, prior to any
sale or other transfer of the Stock to any other person, first offer the Stock
to the issuing Employer and to the Plan at the greater of (i) its current fair
market value, or (ii) the purchase price offered in good faith by an independent
third party purchaser. This restriction shall apply to any transfer, whether
voluntary, involuntary, or by operation of law, and whether for consideration or
gratuitous. Either the Employer or the Trustee may accept the offer within 14
days after it is delivered. Any Stock distributed by the Plan shall bear a
conspicuous legend describing the right of first refusal under this Section
10.7, as well as any other restrictions upon the transfer of the Stock imposed
by federal and state securities laws and regulations.
10.8 Continuing Loan Provisions; Creations of Protections and Rights.
Except as otherwise provided in Sections 10.6 and 10.7 and this Section, no
shares of Employer Stock held or distributed by the Trustee may be subject to a
put, call or other option, or buy-sell arrangement. The provisions of this
Section shall continue to by applicable to such Stock even if the Plan ceases to
be an employee stock ownership plan under Section 4975(e)(7) of the Code.
10.9 Direct Rollover of Eligible Distribution. A Participant or
distributee may elect, at the time and in the manner prescribed by the Trustee
or the Committee, to have any portion of an eligible rollover distribution paid
directly to an eligible retirement plan specified by the Participant or
distributee in a direct rollover.
10.9.1 An "eligible rollover" is any distribution that does
not include: any distribution that is one of a series of substantially
equal periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the distributee or the joint lives (or
joint life expectancies) of the Participant and the Participant's
Beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under Code
Section 401(a)(9); and the portion of any distribution that is not
included in gross income (determined without regard to the exclusion
for net unrealized appreciation with respect to employer securities).
10.9.2 An "eligible retirement plan" is an individual
retirement account described in Code Section 401(a), an individual
retirement annuity described in Code Section 408(b), an annuity plan
described in Code Section 403(a), or a qualified trust described in
Code Section 401(a), that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover
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distribution to the surviving Spouse, an eligible retirement plan is an
individual retirement account or individual retirement annuity.
10.9.3 A "direct rollover" is a payment by the Plan to the
eligible retirement plan specified by the distributee.
10.9.4 The term "distributee" shall refer to a deceased
Participant's Spouse or a Participant's former Spouse who is the
alternate payee under a qualified domestic relations order, as defined
in Code Section 414(p).
10.10 Waiver of 30 Day Period After Notice of Distribution. If a
distribution is one to which Sections 401(a)(11) and 417 of the Code do not
apply, such distribution may commence less than 30 days after the notice
required under Section 1.411(a)-11(c) of the Income Tax Regulations is given,
provided that:
(i) the Trustee or Administrative Committee, as
applicable, clearly informs the Participant
that the Participant has a right to a period
of at least 30 days after receiving the
notice to consider the decision of whether
or not to elect a distribution (and, if
applicable, a particular option), and
(ii) the Participant, after receiving the notice,
affirmatively elects a distribution.
Section 11. Rules Governing Benefit Claims and Review of Appeals.
11.1 Claim for Benefits. Any Participant or Beneficiary who qualifies
for the payment of benefits shall file a claim for his benefits with the
Committee on a form provided by the Committee. The claim, including any election
of an alternative benefit form, shall be filed at least 30 days before the date
on which the benefits are to begin. If a Participant or Beneficiary fails to
file a claim by the day before the date on which benefits become payable, he
shall be presumed to have filed a claim for payment for the Participant's
benefits in the standard form prescribed by Sections 10.1 or 10.2.
11.2 Notification by Committee. Within 90 days after receiving a claim
for benefits (or within 180 days, if special circumstances require an extension
of time and written notice of the extension is given to the Participant or
Beneficiary within 90 days after receiving the claim for benefits), the
Committee shall notify the Participant or Beneficiary whether the claim has been
approved or denied. If the Committee denies a claim in any respect, the
Committee shall set forth in a written notice to the Participant or Beneficiary:
(i) each specific reason for the denial;
(ii) specific references to the pertinent Plan provisions on
which the denial is based;
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(iii) a description of any additional material or information
which could be submitted by the Participant or Beneficiary to support
his claim, with an explanation of the relevance of such information;
and
(iv) an explanation of the claims review procedures set forth
in Section 11.3.
11.3 Claims Review Procedure. Within 60 days after a Participant or
Beneficiary receives notice from the Committee that his claim for benefits has
been denied in any respect, he may file with the Committee a written notice of
appeal setting forth his reasons for disputing the Committee's determination. In
connection with his appeal the Participant or Beneficiary or his representative
may inspect or purchase copies of pertinent documents and records to the extent
not inconsistent with other Participants' and Beneficiaries' rights of privacy.
Within 60 days after receiving a notice of appeal from a prior determination (or
within 120 days, if special circumstances require an extension of time and
written notice of the extension is given to the Participant or Beneficiary and
his representative within 60 days after receiving the notice of appeal), the
Committee shall furnish to the Participant or Beneficiary and his
representative, if any, a written statement of the Committee's final decision
with respect to his claim, including the reasons for such decision and the
particular Plan provisions upon which it is based.
Section 12. The Committee and Its Functions.
12.1 Authority of Committee. The Committee shall be the "plan
administrator" within the meaning of ERISA and shall have exclusive
responsibility and authority to control and manage the operation and
administration of the Plan, including the interpretation and application of its
provisions, except to the extent such responsibility and authority are otherwise
specifically (i) allocated to the Bank, the Employers, or the Trustee under the
Plan and Trust Agreement, (ii) delegated in writing to other persons by the
Bank, the Employers, the Committee, or the Trustee, or (iii) allocated to other
parties by operation of law. The Committee shall have exclusive responsibility
regarding decisions concerning the payment of benefits under the Plan. The
Committee shall have no investment responsibility with respect to the Investment
Fund except to the extent, if any, specifically provided in the Trust Agreement.
In the discharge of its duties, the Committee may employ accountants, actuaries,
legal counsel, and other agents (who also may be employed by an Employer or the
Trustee in the same or some other capacity) and may pay their reasonable
expenses and compensation.
12.2 Identity of Committee. The Committee shall consist of three or
more individuals selected by the Bank. Any individual, including a director,
trustee, shareholder, officer, or Employee of an Employer, shall be eligible to
serve as a member of the Committee. The Bank shall have the power to remove any
individual serving on the Committee at any time without cause upon 10 days
written notice, and any individual may resign from the Committee at any time
upon 10 days written notice to the Bank. The Bank shall notify the Trustee of
any change in membership of the Committee.
12.3 Duties of Committee. The Committee shall keep whatever records may
be necessary to implement the Plan and shall furnish whatever reports may be
required from time to time by the Bank. The Committee shall furnish to the
Trustee whatever information may be necessary to properly administer the Trust.
The Committee shall see to the filing with the appropriate government agencies
of all reports and returns required of the Plan Committee under ERISA and other
laws.
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Further, the Committee shall have exclusive responsibility and
authority with respect to the Plan's holdings of Stock and shall direct the
Trustee in all respects regarding the purchase, retention, sale, exchange, and
pledge of Stock and the creation and satisfaction of Stock Obligations. The
Committee shall at all times act consistently with the Bank's long-term
intention that the Plan, as an employee stock ownership plan, be invested
primarily in Stock. Subject to the direction of the Board as to the application
of Employer contributions to Stock Obligations, and subject to the provisions of
Sections 6.4 and 10.6 as to Participants' rights under certain circumstances to
have their Accounts invested in Stock or in assets other than Stock, the
Committee shall determine in its sole discretion the extent to which assets of
the Trust shall be used to repay Stock Obligations, to purchase Stock, or to
invest in other assets to be selected by the Trustee or an investment manager.
No provision of the Plan relating to the allocation or vesting of any interests
in the Stock Fund or the Investment Fund shall restrict the Committee from
changing any holdings of the Trust, whether the changes involve an increase or a
decrease in the Stock or other assets credited to Participants' Accounts. In
determining the proper extent of the Trust's investment in Stock, the Committee
shall be authorized to employ investment counsel, legal counsel, appraisers, and
other agents to pay their reasonable expenses and compensation.
12.4 Valuation of Stock. If the valuation of any Stock is not
established by reported trading on a generally recognized public market, the
Committee shall have the exclusive authority and responsibility to determine its
value for all purposes under the Plan. Such value shall be determined as of each
Valuation Date, and on any other date as of which the Plan purchases or sells
such Stock. The Committee shall use generally accepted methods of valuing stock
of similar corporations for purposes of arm's length business and investment
transactions, and in this connection the Committee shall obtain, and shall be
protected in relying upon, the valuation of such Stock as determined by an
independent appraiser experienced in preparing valuations of similar businesses.
For purposes of the preceding sentence, the term "independent appraiser' means
any appraiser meeting requirements similar to the requirements of the
regulations prescribed under Section 170(a)(1) of the Code.
12.5 Compliance with ERISA. The Committee shall perform all acts
necessary to comply with ERISA. Each individual member or employee of the
Committee shall discharge his duties in good faith and in accordance with the
applicable requirements of ERISA.
12.6 Action by Committee. All actions of the Committee shall be
governed by the affirmative vote of a number of members which is a majority of
the total number of members currently appointed, including vacancies. The
members of the Committee may meet informally and may take any action without
meeting as a group.
12.7 Execution of Documents. Any instrument executed by the Committee
shall be signed by any member or employee of the Committee.
12.8 Adoption of Rules. The Committee shall adopt such rules and
regulations of uniform applicability as it deems necessary or appropriate for
the proper administration and interpretation of the Plan.
12.9 Responsibilities to Participants. The Committee shall determine
which Employees qualify to enter the Plan. The Committee shall furnish to each
eligible Employee whatever summary plan descriptions, summary annual reports,
and other notices and information may be required under ERISA.
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The Committee also shall determine when a Participant or his Beneficiary
qualifies for the payment of benefits under the Plan. The Committee shall
furnish to each such Participant or Beneficiary whatever information is required
under ERISA (or is otherwise appropriate) to enable the Participant or
Beneficiary to make whatever elections may be available pursuant to Sections 6
and 10, and the Committee shall provide for the payment of benefits in the
proper form and amount from the assets of the Trust Fund. The Committee may
decide in its sole discretion to permit modifications of elections and to defer
or accelerate benefits to the extent consistent with applicable law and the best
interests of the individuals concerned.
12.10 Alternative Payees in Event of Incapacity. If the Committee finds
at any time that an individual qualifying for benefits under this Plan is a
minor or is incompetent, the Committee may direct the benefits to be paid, in
the case of a minor, to his parents, his legal guardian, or a custodian for him
under the Uniform Gifts to Minors Act, or, in the case of an incompetent, to his
spouse, or his legal guardian, the payments to be used for the individual's
benefit. The Committee and the Trustee shall not be obligated to inquire as to
the actual use of the funds by the person receiving them under this Section
12.10, and any such payment shall completely discharge the obligations of the
Plan, the Trustee, the Committee, and the Employers to the extent of the
payment.
12.11 Indemnification by Employers. Except as separately agreed in
writing, the Committee, and any member or employee of the Committee, shall be
indemnified and held harmless by the Employer, jointly and severally, to the
fullest extent permitted by law against any and all costs, damages, expenses,
and liabilities reasonably incurred by or imposed upon it or him in connection
with any claim made against it or him or in which it or he may be involved by
reason of its or his being, or having been, the Committee, or a member or
employee of the Committee, to the extent such amounts are not paid by insurance.
12.12 Nonparticipation by Interested Member. Any member of the
Committee who also is a Participant in the Plan shall take no part in any
determination specifically relating to his own participation or benefits, unless
his abstention would leave the Committee incapable of acting on the matter.
Section 13. Adoption, Amendment, or Termination of the Plan.
13.1 Adoption of Plan by Other Employers. With the consent of the Bank,
any entity may become a participating Employer under the Plan by (i) taking such
action as shall be necessary to adopt the Plan, (ii) becoming a party to the
Trust Agreement establishing the Trust Fund, and (iii) executing and delivering
such instruments and taking such other action as may be necessary or desirable
to put the Plan into effect with respect to the entity's Employees.
13.2 Adoption of Plan by Successor. In the event that any Employer
shall be reorganized by way of merger, consolidation, transfer of assets or
otherwise, so that an entity other than an Employer shall succeed to all or
substantially all of the Employer's business, the successor entity may be
substituted for the Employer under the Plan by adopting the Plan and becoming a
party to the Trust Agreement. Contributions by the Employer shall be
automatically suspended from the effective date of any such reorganization until
the date upon which the substitution of the successor entity for the Employer
under the Plan becomes effective. If, within 90 days following the effective
date of any such reorganization, the successor entity shall not have elected to
become a party to the Plan, or if the Employer shall adopt a plan of complete
liquidation other than in connection with a reorganization, the Plan shall be
automatically
-26-
<PAGE>
terminated with respect to Employees of the Employer as of the close of business
on the 90th day following the effective date of the reorganization, or as of the
close of business on the date of adoption of a plan of complete liquidation, as
the case may be.
13.3 Plan Adoption Subject to Qualification. Notwithstanding any other
provision of the Plan, the adoption of the Plan and the execution of the Trust
Agreement are conditioned upon their being determined initially by the Internal
Revenue Service to meet the qualification requirements of Section 401(a) of the
Code, so that the Employers may deduct currently for federal income tax purposes
their contributions to the Trust and so that the Participants may exclude the
contributions from their gross income and recognize income only when they
receive benefits. In the event that this Plan is held by the Internal Revenue
Service not to qualify initially under Section 401(a), the Plan may be amended
retroactively to the earliest date permitted by U.S. Treasury Regulations in
order to secure qualification under Section 401(a). If this Plan is held by the
Internal Revenue Service not to qualify initially under Section 401(a) either as
originally adopted or as amended, each Employer's contributions to the Trust
under this Plan (including any earnings thereon) shall be returned to it and
this Plan shall be terminated. In the event that this Plan is amended after its
initial qualification and the Plan as amended is held by the Internal Revenue
Service not to qualify under Section 401(a), the amendment may be modified
retroactively to the earliest date permitted by U.S. Treasury Regulations in
order to secure approval of the amendment under Section 401(a).
13.4 Right to Amend or Terminate. The Bank intends to continue this
Plan as a permanent program. However, each participating Employer separately
reserves the right to suspend, supersede, or terminate the Plan at any time and
for any reason, as it applies to that Employer's Employees, and the Bank
reserves the right to amend, suspend, supersede, merge, consolidate, or
terminate the Plan at any time and for any reason, as it applies to the
Employees of each Employer. No amendment, suspension, supersession, merger,
consolidation, or termination of the Plan shall (i) reduce any Participant's or
Beneficiary's proportionate interest in the Trust Fund, (ii) reduce or restrict,
either directly or indirectly, the benefit provided any Participant prior to the
amendment, or (iii) divert any portion of the Trust Fund to purposes other than
the exclusive benefit of the Participants and their Beneficiaries prior to the
satisfaction of all liabilities under the Plan. Moreover, there shall not be any
transfer of assets to a successor plan or merger or consolidation with another
plan unless, in the event of the termination of the successor plan or the
surviving plan immediately following such transfer, merger, or consolidation,
each participant or beneficiary would be entitled to a benefit equal to or
greater than the benefit he would have been entitled to if the plan in which he
was previously a participant or beneficiary had terminated immediately prior to
such transfer, merger, or consolidation. Following a termination of this Plan by
the Bank, the Trustee shall continue to administer the Trust and pay benefits in
accordance with the Plan as amended from time to time and the Committee's
instructions.
Section 14. Miscellaneous Provisions.
14.1 Plan Creates No Employment Rights. Nothing in this Plan shall be
interpreted as giving any Employee the right to be retained as an Employee by an
Employer, or as limiting or affecting the rights of an Employer to control its
Employees or to terminate the Service of any Employee at any time and for any
reason, subject to any applicable employment or collective bargaining
agreements.
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<PAGE>
14.2 Nonassignability of Benefits. No assignment, pledge, or other
anticipation of benefits from the Plan will be permitted or recognized by the
Employer, the Committee, or the Trustee. Moreover, benefits from the Plan shall
not be subject to attachment, garnishment, or other legal process for debts or
liabilities of any Participant or Beneficiary, to the extent permitted by law.
This prohibition on assignment or alienation shall apply to any judgment,
decree, or order (including approval of a property settlement agreement) which
relates to the provision of child support, alimony, or property rights to a
present or former spouse, child or other dependent of a Participant pursuant to
a State domestic relations or community property law, unless the judgment,
decree, or order is determined by the Committee to be a qualified domestic
relations order within the meaning of Section 414(p) of the Code, as more fully
set forth in Section 14.12 hereof.
14.3 Limit of Employer Liability. The liability of the Employer with
respect to Participants under this Plan shall be limited to making contributions
to the Trust from time to time, in accordance with Section 4.
14.4 Treatment of Expenses. All expenses incurred by the Committee and
the Trustee in connection with administering this Plan and Trust Fund shall be
paid by the Trustee from the Trust Fund to the extent the expenses have not been
paid or assumed by the Employer or by the Trustee.
14.5 Number and Gender. Any use of the singular shall be interpreted to
include the plural, and the plural the singular. Any use of the masculine,
feminine, or neuter shall be interpreted to include the masculine, feminine, or
neuter, as the context shall require.
14.6 Nondiversion of Assets. Except as provided in Sections 5.3 and
13.3, under no circumstances shall any portion of the Trust Fund be diverted to
or used for any purpose other than the exclusive benefit of the Participants and
their Beneficiaries prior to the satisfaction of all liabilities under the Plan.
14.7 Separability of Provisions. If any provision of this Plan is held
to be invalid or unenforceable, the other provisions of the Plan shall not be
affected but shall be applied as if the invalid or unenforceable provision had
not been included in the Plan.
14.8 Service of Process. The agent for the service of process upon the
Plan shall be the president of the Bank, or such other person as may be
designated from time to time by the Bank.
14.9 Governing Law. This Plan shall be interpreted in accordance with
the laws of the Commonwealth of Massachusetts to the extent those laws are
applicable under the provisions of ERISA.
14.10 Employer Contributions Conditioned on Deductibility. Employer
Contributions to the Plan are conditioned on deductibility under Code Section
404. In the event that the Internal Revenue Service shall determine that all or
any portion of an Employer Contribution is not deductible under that Section,
the nondeductible portion shall be returned to the Employer within one year of
the disallowance of the deduction.
14.11 Unclaimed Accounts. Neither the Employer nor the Trustees shall
be under any obligation to search for, or ascertain the whereabouts of, any
Participant or Beneficiary. The Employer
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<PAGE>
or the Trustees, by certified or registered mail addressed to his last known
address of record with the Employer, shall notify any Participant or Beneficiary
that he is entitled to a distribution under this Plan, and the notice shall
quote the provisions of this Section. If the Participant or Beneficiary fails to
claim his benefits or make his whereabouts known in writing to the Employer or
the Trustees within seven (7) calendar years after the date of notification, the
benefits of the Participant or Beneficiary under the Plan will be disposed of as
follows:
(a) If the whereabouts of the Participant is unknown but the
whereabouts of the Participant's Beneficiary is known to the Trustees,
distribution will be made to the Beneficiary.
(b) If the whereabouts of the Participant and his Beneficiary
are unknown to the Trustees, the Plan will forfeit the benefit,
provided that the benefit is subject to a claim for reinstatement if
the Participant or Beneficiary make a claim for the forfeited benefit.
Any payment made pursuant to the power herein conferred upon the
Trustees shall operate as a complete discharge of all obligations of the
Trustees, to the extent of the distributions so made.
14.12 Qualified Domestic Relations Order. Section 14.2 shall not apply
to a "qualified domestic relations order" defined in Code Section 414(p), and
such other domestic relations orders permitted to be so treated by Administrator
under the provisions of the Retirement Equity Act of 1984. Further, to the
extent provided under a "qualified domestic relations order", a former Spouse of
a Participant shall be treated as the Spouse or surviving Spouse for all
purposes under the Plan.
In the case of any domestic relations order received by the Plan:
(a) The Employer or the Plan Committee shall promptly notify
the Participant and any other alternate payee of the receipt of such
order and the Plan's procedures for determining the qualified status of
domestic relations orders, and
(b) Within a reasonable period after receipt of such order,
the Employer or the Plan Committee shall determine whether such order
is a qualified domestic relations order and notify the Participant and
each alternate payee of such determination. The Employer or the Plan
Committee shall establish reasonable procedures to determine the
qualified status of domestic relations orders and to administer
distributions under such qualified orders.
During any period in which the issue of whether a domestic relations
order is a qualified domestic relations order is being determined (by the
Employer or Plan Committee, by a court of competent jurisdiction, or otherwise),
the Employer or the Plan Committee shall segregate in a separate account in the
Plan or in an escrow account the amounts which would have been payable to the
alternate payee during such period if the order had been determined to be a
qualified domestic relations order. If within eighteen (18) months the order (or
modification thereof) is determined to be a qualified domestic relations order,
the Employer or the Plan Committee shall pay the segregated amounts (plus any
interest thereon) to the person or persons entitled thereto. If within eighteen
(18) months it is determined that the order is not a qualified domestic
relations order, or the issue as to whether such order is a qualified domestic
relations order is not resolved, then the Employer or the Plan Committee shall
pay the segregated amounts (plus any interest thereon) to the person or persons
who would have been entitled to such amounts if there had been
-29-
<PAGE>
no order. Any determination that an order is a qualified domestic relations
order which is made after the close of the eighteen (18) month period shall be
applied prospectively only. The term "alternate payee" means any Spouse, former
Spouse, child or other dependent of a Participant who is recognized by a
domestic relations order as having a right to receive all, or a portion of, the
benefit payable under a Plan with respect to such Participant.
Section 15. Top-Heavy Provisions.
15.1 Top-Heavy Plan. For any Plan Year beginning after December 31,
1983, this Plan is top-heavy if any of the following conditions exist:
(a) If the top-heavy ratio for this Plan exceeds sixty percent
(60%) and this Plan is not part of any required aggregation group or permissive
aggregation group;
(b) If this Plan is a part of a required aggregation group
(but is not part of a permissive aggregation group) and the aggregate top-heavy
ratio for the group of Plans exceeds sixty percent (60%); or
(c) If this Plan is a part of a required aggregation group and
part of a permissive aggregation group and the aggregate top-heavy ratio for the
permissive aggregation group exceeds sixty percent (60%).
15.2 Super Top-Heavy Plan For any Plan Year beginning after December
31, 1983, this Plan will be a super top-heavy Plan if any of the following
conditions exist:
(a) If the top-heavy ratio for this Plan exceeds ninety
percent (90%) and this Plan is not part of any required aggregation group or
permissive aggregation group.
(b) If this Plan is a part of a required aggregation group
(but is not part of a permissive aggregation group) and the aggregate top-heavy
ratio for the group of Plans exceeds ninety percent (90%), or
(c) If this Plan is a part of a required aggregation group and
part of a permissive aggregation group and the aggregate top-heavy ratio for the
permissive aggregation group exceeds ninety percent (90%).
15.3 Definitions.
In making this determination, the Committee shall use the following definitions
and principles:
15.3.1 The "Determination Date", with respect to the first
Plan Year of any plan, means the last day of that Plan Year, and with
respect to each subsequent Plan Year, means the last day of the
preceding Plan Year. If any other plan has a Determination Date which
differs from this Plan's Determination Date, the top-heaviness of this
Plan shall be determined on the basis of the other plan's Determination
Date falling within the same calendar years as this Plan's
Determination Date.
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<PAGE>
15.3.2 A "Key Employee", with respect to a Plan Year, means an
Employee who at any time during the five years ending on the top-heavy
Determination Date for the Plan Year has received compensation from an
Employer and has been (i) an officer of the Employer having 415
Compensation greater than 50 percent of the limit then in effect under
Section 415(b)(1)(A) of the Code, (ii) one of the 10 Employees owning
the largest interests in the Employer having 415 Compensation greater
than the limit then in effect under Section 415(c)(1)(A), (iii) an
owner of more than five percent of the outstanding equity interest or
the outstanding voting interest in any Employer, or (iv) an owner of
more than one percent of the outstanding equity interest or the
outstanding voting interest in an Employer whose annual compensation
exceeds $150,000. For purposes of determining whether an Employee is a
Key Employee, annual compensation means compensation as defined in
Section 415(c)(3) of the Code, but including amounts contributed by the
Employee pursuant to a salary reduction agreement which are excludable
from the Employee's gross income under Section 125, Section 402(e)(3),
Section 402(H)(1)(B) or Section 403(b) of the Code. The Beneficiary of
a Key Employee shall also be considered a Key Employee.
15.3.3 A "Non-key Employee" means an Employee who at any time
during the five years ending on the top-heavy Determination Date for
the Plan Year has received compensation from an Employer and who has
never been a Key Employee, and the Beneficiary of any such Employee.
15.3.4 A "required aggregation group" includes (a) each
qualified Plan of the Employer in which at least one Key Employee
participates in the Plan Year containing the Determination Date and any
of the four (4) preceding Plan Years, and (b) any other qualified Plan
of the Employer which enables a Plan described in (a) to meet the
requirements of Code Sections 401(a)(4) and 410. For purposes of the
preceding sentence, a qualified Plan of the Employer includes a
terminated Plan maintained by the Employer within the five (5) year
period ending on the Determination Date. In the case of a required
aggregation group, each Plan in the group will be considered a
top-heavy Plan if the required aggregation group is a top-heavy group.
No Plan in the required aggregation group will be considered a
top-heavy Plan if the required aggregation group is not a top-heavy
group. All Employers aggregated under Code Sections 414(b), (c) or (m)
or (o) (but only after the Code Section 414(o) regulations become
effective) are considered a single Employer.
15.3.5 A "permissive aggregation group" includes the required
aggregation group of Plans plus any other qualified Plan(s) of the
Employer that are not required to be aggregated but which, when
considered as a group with the required aggregation group, satisfy the
requirements of Code Sections 401(a)(4) and 410 and are comparable to
the Plans in the required aggregation group. No Plan in the permissive
aggregation group will be considered a top-heavy Plan if the permissive
aggregation group is not a top-heavy group. Only a Plan that is part of
the required aggregation group will be considered a top-heavy Plan if
the permissive aggregation group is top-heavy.
15.4 Top-Heavy Rules of Application.
For purposes of determining the value of Account balances and
the present value of accrued benefits the following provisions shall apply:
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<PAGE>
15.4.1 The value of Account balances and the present value of
accrued benefits will be determined as of the most recent Valuation
Date that falls within or ends with the twelve (12) month period ending
on the Determination Date.
15.4.2 For purposes of testing whether this Plan is top-heavy,
the present value of an individual's accrued benefits and an
individual's Account balances is counted only once each year.
15.4.3 The Account balances and accrued benefits of a
Participant who is not presently a Key Employee but who was a Key
Employee in a Plan Year beginning on or after January 1, 1984 will be
disregarded.
15.4.4 Employer contributions attributable to a salary
reduction or similar arrangement will be taken into account.
15.4.5 When aggregating Plans, the value of Account balances
and accrued benefits will be calculated with reference to the
Determination Dates that fall within the same calendar year.
15.4.6 The present value of the accrued benefits or the amount
of the Account balances of an Employee shall be increased by the
aggregate distributions made to such Employee from a Plan of the
Employer. No distribution, however, made from the Plan to an individual
(other than the beneficiary of a deceased Employee who was an Employee
within the five (5) year period ending on the Determination Date) who
has not been an Employee at any time during the five (5) year period
ending on the Determination Date shall be taken into account in
determining whether the Plan is top-heavy. Also, any amounts
recontributed by an Employee upon becoming a Participant in the Plan
shall no longer be counted as a distribution under this paragraph.
15.4.7 The present value of the accrued benefits or the amount
of the Account balances of an Employee shall be increased by the
aggregate distributions made to such Employee from a terminated Plan of
the Employer, provided that such Plan (if not terminated) would have
been required to be included in the aggregation group.
15.4.8 Accrued benefits and Account balances of an individual
shall not be taken into account for purposes of determining the
top-heavy ratios if the individual has performed no services for the
Employer during the five (5) year period ending on the applicable
Determination Date. Compensation for purposes of this subparagraph
shall not include any payments made to an individual by the Employer
pursuant to a qualified or non-qualified deferred compensation plan.
15.4.9 The present value of the accrued benefits or the amount
of the Account balances of any Employee participating in this Plan
shall not include any rollover contributions or other transfers
voluntarily initiated by the Employee except as described below. If a
rollover was received by this Plan after December 31, 1983, the
rollover or transfer voluntarily initiated by the Employee was received
prior to January 1, 1984, then the rollover or transfer shall be
considered as part of the accrued benefit by the Plan receiving such
rollover or transfer. If this Plan transfers or rolls over funds to
another Plan in a transaction voluntarily initiated by the Employee
after December 31, 1983, then this Plan shall count the distribution
for purposes of determining Account balances or the present value of
accrued benefits. A transfer incident to a merger or
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<PAGE>
consolidation of two or more Plans of the Employer (including Plans of
related Employers treated as a single Employer under Code Section 414),
or a transfer or rollover between Plans of the Employer, shall not be
considered as voluntarily initiated by the Employee.
15.5 Top-Heavy Ratio.
If the Employer maintains one (1) or more defined contribution plans
(including any simplified Employee pension plan) and the Employer has never
maintained any defined benefit plans which have covered or could cover a
Participant in this Plan, the top-heavy ratio is a fraction, the numerator of
which is the sum of the Account balances of all Key Employees as of the
Determination Date, and the denominator of which is the sum of the Account
balances of all Employees as of the Determination Date. Both the numerator and
denominator of the top-heavy ratio shall be increased to reflect any
contribution which is due but unpaid as of the Determination Date.
If the Employer maintains one (1) or more defined contribution plans
(including any simplified Employee pension plan) and the Employer maintains or
has maintained one (1) or more defined benefit plans which have covered or could
cover a Participant in this Plan, the top-heavy ratio is a fraction, the
numerator of which is the sum of Account balances under the defined contribution
plans for all Key Employees and the present value of accrued benefits under the
defined benefit plans for all Key Employees, and the denominator of which is the
sum of the Account balances under the defined contribution plans for all
Employees and the present value of accrued benefits under the defined benefit
plans for all Employees.
For these purposes, the accrued benefit of a Participant other than a
key Employee in a defined benefit plan shall be determined under (a) the method,
if any, that uniformly applies for accrual purposes under all defined benefit
plans maintained by the Employer, or (b) of there is no such method, as if such
benefit accrued not more rapidly than the slowest accrual rate permitted under
the fractional rule of Section 411(b)(1)(C).
15.6 Minimum Contributions. For any Top-Heavy Year, each Employer shall
make a special contribution on behalf of each Participant to the extent that the
total allocations to his Account pursuant to Section 4 is less than the lesser
of:
(i) three percent of his 415 Compensation for that year, or
(ii) the highest ratio of such allocation to 415 Compensation
received by any Key Employee for that year. For purposes of the special
contribution of this Section 15.2, a Key Employee's 415 Compensation
shall include amounts the Key Employee elected to defer under a
qualified 401(k) arrangement. Such a special contribution shall be made
on behalf of each Participant who is employed by an Employer on the
last day of the Plan Year, regardless of the number of his Hours of
Service, and shall be allocated to his Account.
For any Plan Year when (1) the Plan is top-heavy and (2) a Non-key
Employee is a Participant in both this Plan and a defined benefit plan included
in the plan aggregation group which is top heavy, the sum of the Employer
contributions and forfeitures allocated to the Account of each such Non-key
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<PAGE>
Employee shall be equal to at least five percent (5%) of such Non-key Employee's
415 Compensation for that year.
15.7 Minimum Vesting. For any Plan year in which this Plan is
Top-Heavy, a participant's vested interest in his Account shall be based on the
following "top-heavy table":
Vesting Percentage of
Years Interest Vested
------- ---------------
Fewer than 2 years 0%
2 20%
3 40%
4 60%
5 80%
6 100%
15.8 Top-Heavy Provisions Control in Top-Heavy Plan. In the event this
Plan becomes top-heavy and a conflict arises between the top-heavy provisions
herein set forth and the remaining provisions set forth in this Plan, the
top-heavy provisions shall control.
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<PAGE>
FIRST AMENDMENT TO THE
BROOKLINE SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
The Brookline Savings Bank (the "Bank") Employee Stock Ownership Plan
is hereby amended effective November 1, 1997, unless otherwise stated in
accordance with the following:
FIRST CHANGE
Section 4.1 is amended to read as follows:
"4.1 Discretionary Contributions . The Employer shall from time to time
contribute, with respect to a Plan Year, such amounts as it may
determine from time to time. The Employer shall have no obligation to
contribute any amount under this Plan except as so determined in its
sole discretion. The Employer's contributions and available forfeitures
for a Plan Year shall be credited as of the last day of the year to the
Accounts of the Active Participants in proportion to their amounts of
Cash Compensation earned while a Participant in the Plan.
Notwithstanding anything to the contrary herein, in the event the
allocation of the Employer's contribution would cause more than
one-third of the shares of Stock released from the Unallocated Stock
Account in a given year to be allocated to the Accounts of Highly Paid
Employee Participants, and such allocation would cause any Highly Paid
Employee Participant to exceed the limitations under Code Section
415(c) or the Employer to exceed the deduction limits under Code
Section 404, then the Employer Contribution shall not be allocated to
such Highly Paid Employee Participants in proportion to such Highly
Paid Employee Participant's amount of Cash Compensation. Rather, the
Employer Contribution shall be allocated to the Accounts of Highly Paid
Employee Participants in proportion to their "Relative Cash
Compensation." For these purposes "Relative Cash Compensation" shall
mean the Cash Compensation for each Highly Paid Employee Participant
which shall be taken into consideration for purposes of receiving an
allocation of the Employer Contribution. The aggregate Relative Cash
Compensation shall be determined by the following formula: (N [divided
by] 2) - $1 = H, where "N" equals the aggregate amount of Cash
Compensation attributable to Non- highly Paid Employees and "H" equals
the aggregate Relative Cash Compensation attributable to Highly Paid
Employee Participants. Once the aggregate Relative Cash Compensation
for all Highly Paid Employee Participants is determined, the Relative
Cash Compensation attributable to each Highly Paid Employee Participant
is determined by Multiplying the aggregate Relative Cash Compensation
by a fraction, the numerator of which is the Cash Compensation of a
Highly Paid Employee Participant and the denominator of which is the
Cash Compensation for all Highly Paid Employee Participants.
Notwithstanding any other provision of the
1
<PAGE>
Plan to the contrary, contributions and benefits will be provided in
accordance with Section 414(u) of the Code, relating to veteran's
reemployment rights."
SECOND CHANGE
Section 5.1-1 is amended to read as follows:
"5.1-1 If allocation of Employer contributions in accordance with
Section 4.1 will result in an allocation of more than one-third the
total contributions for a Plan Year to the accounts of Highly Paid
Employees, and such allocation would cause any Highly Paid Employee to
exceed the limitations under Code Section 415(c) or the Employer to
exceed the deduction limits under Code Section 404, then allocation of
such amount shall be adjusted in the manner set forth in Section 4.1 so
that such excess will not occur."
IN WITNESS WHEREOF, this Amendment has been adopted by the Bank as of
the 16th day of July, 1998, and executed by its duly authorized officers.
ATTEST: BROOKLINE SAVINGS BANK
- - -------------------------- ---------------------------
Secretary Executive Officer
2
<PAGE>
SECOND AMENDMENT
TO THE
BROOKLINE SAVINGS BANK EMPLOYEE STOCK OWNERSHIP PLAN
The Brookline Savings Bank Employee Stock Ownership Plan is hereby
amended effective November 1, 1997, unless otherwise stated in accordance with
the following:
FIRST CHANGE
Section 10.1 of the Plan shall be amended by the addition of the
following to the end thereof:
All distributions under this section shall be determined and made in
accordance with the regulations under Code Section 401(a)(9), including
Section 1.401(a)(9)-2. The provisions reflecting Section 401(a)(9)
override any distribution options in the Plan inconsistent with Section
401(a)(9).
SECOND CHANGE
Section 15.3.4 of the Plan shall be amended by replacing the word "and"
with the word "or" where it appears between Code Sections 401(a)(4) and
410.
IN WITNESS WHEREOF, this Amendment has been adopted by the Bank as of
the ____ day of January, 1999 and executed by its duly authorized officers.
ATTEST: BROOKLINE SAVINGS BANK
- - -------------------- ---------------------------
Secretary Executive Officer
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<RECOVERIES> 332
<ALLOWANCE-CLOSE> 13,094
<ALLOWANCE-DOMESTIC> 9,098
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,996
</TABLE>
