<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ______________ to ______________
Commission file number: 0-23695
BROOKLINE BANCORP, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3402944
(State or other jurisdiction of ) (I.R.S. Employer
incorporation of organization Identification No.)
160 WASHINGTON STREET, BROOKLINE, MA 02447-0469
(Address of principal executive offices) (Zip Code)
(617) 730-3500
(Registrant's telephone number, including area code)
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 $0.01 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. [ X ]
The number of shares of common stock held by nonaffiliates of the
registrant as of March 15, 2000 was 11,847,232 for an aggregate market value of
$108,846,444. This excludes 15,420,350 shares held by Brookline Bancorp, MHC and
491,604 shares held by Brookline Savings Bank Employee Stock Ownership Plan and
Trust.
At March 15, 2000, the number of shares of common stock, par value $0.01
per share, issued and outstanding were 29,641,500 and 27,759,186, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of the Annual Report to Stockholders for the year ended December
31, 1999 (Part II and Part III)
2. Proxy Statement for 2000 Annual Meeting of Stockholders (Part III)
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-K
INDEX
<TABLE>
<CAPTION>
Part I Page
------ ----
<S> <C>
Item 1. Business 1
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Submission Of Matters To A Vote Of Security Holders 21
Part II
-------
Item 5. Market For The Registrant's Common Stock And
Related Security Holder Matters 22
Item 6. Selected Consolidated Financial Data 22
Item 7. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations 22
Item 7a. Quantitative And Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements And Supplementary Data 22
Item 9. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosures 22
Part III
--------
Item 10. Directors and Executive Officers Of The Registrant 22
Item 11. Executive Compensation 23
Item 12. Security Ownership Of Certain Beneficial Owners
And Management 23
Item 13. Certain Relationships And Related Transactions 23
Part IV
-------
Item 14. Exhibits, Financial Statement Schedules And Reports
On Form 8-K 23
Signatures 25
</TABLE>
<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 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 has 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
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 mutifamily 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 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.
1
<PAGE>
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, until recently, 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 federal legislation enacted on November 19, 1999 which
is intended to modernize the financial services industry.
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
<PAGE>
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.
On November 12, 1999, the Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 was signed into law. This federal legislation is
intended to modernize the financial services industry by establishing a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms and other financial service providers. As a result
of the legislation, bank holding companies are permitted to engage in a wider
variety of financial activities than permitted under prior law, particularly
with respect to insurance and securities activities. In addition, in a change
from prior law, bank holding companies are in a position to be owned, controlled
or acquired by any company engaged in financially-related activities. However,
to the extent that it permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further consolidation.
This additional consolidation could result in a growing number of larger
financial institutions that offer a wider variety of financial services than the
Company might be able to offer. This could adversely impact the Company's
ability to retain and attract customers that prefer to obtain all of their
financial services from one provider and, ultimately, the Company's
profitability.
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.
3
<PAGE>
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.
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 each savings bank member assessments
based upon the level of the member'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
4
<PAGE>
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, dismiss directors or officers, and
restrict interest rates paid on deposits, compensation of executive officers and
capital distributions by a parent holding company.
Based on the foregoing, the Bank is currently classified as "well
capitalized".
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, the 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 (i) stock repurchases at amounts designated
by the Commissioner where compelling and valid business reasons are established
to the satisfaction of the Commissioner and (ii) stock repurchases in amounts up
to the shares covered by qualified employee stock benefit plans. 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. By the end of February
2000, the Company had
5
<PAGE>
completed such stock repurchases, had repurchased 546,986 shares in connection
with the Employee Stock Ownership Plan approved by the Board of Directors at the
time of the Offering and had repurchased 367,564 shares in connection with the
546,500 shares awarded under the Recognition and Retention Plan approved by
Company stockholders on April 15, 1999. On March 10, 2000, the Company received
the approval of the Commissioner to repurchase up to 5.0% of its outstanding
shares, exclusive of shares owned by the MHC. Under this newly approved program,
the Company can purchase an additional 610,995 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."
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, mortgage-backed
and mortgage-related securities and corporate equities. The policy 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, 1999, 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 normally 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, 1999, $4.6 million of the Company's debt
securities were rated lower than "A".
In the latter part of 1998 and in 1999, the Company purchased
collateralized mortgage obligations with average maturities of about three years
for yield enhancement. Such obligations had a carrying value of $49.6 million at
December 31, 1999.
6
<PAGE>
At December 31, 1999, the Company's marketable equity securities
portfolio totaled $28.2 million, including net unrealized gains of $13.3
million. Most of the portfolio was comprised of the stocks of national, regional
money center and community banks, Freddie Mac and utility companies. Included in
the portfolio at December 31, 1999 was 4.9% of the common stock of Medford
Bancorp, Inc., a community bank in Massachusetts. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Financial
Condition" for information about this investment. The Company's policy limits
the aggregate carrying value of marketable equity securities to no more than 25%
of the Company's stockholders' 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.
The following table sets forth the composition of the Company's debt
and equity securities portfolios at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Debt securities:
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and Agency obligations... $ 40,895 17.18% $ 92,824 35.69% $ 82,319 44.07%
Corporate obligations.................... 112,999 47.48 124,609 47.91 71,480 38.26
Collateralized mortgage obligations
and mortgage-backed securities........ 49,629 20.85 6,891 2.65 1,265 0.68
-------- ------- -------- ------ --------- -------
Total debt securities.................. 203,523 85.51 224,324 86.25 155,064 83.01
Marketable equity securities.............. 28,186 11.85 30,595 11.76 28,017 15.00
Restricted equity securities.............. 6,279 2.64 5,174 1.99 3,721 1.99
-------- ------- -------- ------ --------- -------
Total investment securities............ $ 237,988 100.00% $ 260,093 100.00% $ 186,802 100.00%
======== ======= ======== ====== ========= =======
Debt and equity securities available for sale $128,275 53.90% $133,529 51.34% $ 117,637 62.98%
Debt securities held to maturity.......... 103,434 43.46 121,390 46.67 65,444 35.03
Restricted equity securities.............. 6,279 2.64 5,174 1.99 3,721 1.99
-------- ------- -------- ------ --------- -------
Total investment securities............ $ 237,988 100.00% $ 260,093 100.00% $ 186,802 100.00%
======== ======= ======== ====== ========= =======
</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.
Since then, the Company has reduced the percentage of its assets in debt
securities in connection with funding growth in the loan portfolio.
7
<PAGE>
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>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- -----
(DOLLARS IN THOUSANDS)
Securities available for sale:
Debt securities:
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and Agency obligations... $ 41,026 $ 40,895 $ 88,186 $ 88,810 $ 74,088 $ 74,287
Corporate obligations.................... 11,409 11,204 8,218 8,183 15,341 15,333
Collateralized mortgage obligations...... 48,729 47,990 5,982 5,941 - -
------- -------- ------- -------- -------- --------
Total debt securities.................. 101,164 100,089 102,386 102,934 89,429 89,620
Marketable equity securities................ 14,878 28,186 7,939 30,595 6,168 28,017
------- -------- ------- -------- -------- --------
Total securities available for sale.... 116,042 128,275 110,325 133,529 95,597 117,637
Net unrealized gains on securities
available for sale........................ 12,233 - 23,204 - 22,040 -
------- -------- ------- -------- -------- --------
Total securities available for sale, net $128,275 $128,275 $133,529 $133,529 $117,637 $117,637
======== ======== ======== ======== ======== ========
Securities held to maturity:
U.S. Government and Agency obligations...... $ - $ - $ 4,014 $ 4,038 $ 8,032 $ 8,032
Corporate obligations....................... 101,795 100,854 116,426 117,012 56,147 56,254
Mortgage-backed securities.................. 1,639 1,597 950 993 1,265 1,314
------- -------- ------- -------- -------- --------
Total securities held to maturity........ $103,434 $102,451 $121,390 $122,043 $ 65,444 $ 65,600
======== ======== ======== ======== ======== ========
Restricted equity securities:
Federal Home Loan Bank of Boston stock...... $ 5,905 $ 4,921 $ 3,468
Massachusetts Savings Bank Life Insurance
Company stock............................. 253 253 253
Other stock................................. 121 - -
------- ------- --------
Total restricted equity securities....... $ 6,279 $ 5,174 $ 3,721
======= ======= ========
</TABLE>
8
<PAGE>
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, 1999.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-------------------------------------------------------------
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
----- ----- ----- ----- ----- -----
Securities available for sale:
Debt securities:
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and Agency obligations . $ 37,917 5.63% $ 2,978 5.71% $ - - %
Corporate obligations .................. 4,495 5.60 6,015 5.92 - -
Collateralized mortgage obligations .... - - 47,990 6.04 - -
-------- -------- -------
Total debt securities ................ 42,412 5.63 56,983 6.01 - -
-------- -------- -------
Marketable equity securities (1) ..........
Total securities available for sale ..
Securities held to maturity:
Corporate obligations ..................... 54,896 5.71 44,503 5.91 2,396 5.95
Mortgage-backed securities .................. - - - - 689 8.79
-------- -------- -------
Total securities held to maturity .... 54,896 5.71 44,503 5.91 3,085 6.58
-------- -------- -------
Restricted equity securities:
Federal Home Loan Bank of Boston stock ....
Massachusetts Savings Bank Life Insurance
Company stock (1) ....................
Other stock ...............................
Total restricted equity securities (1)
-------- -------- -------
Total securities ..................... $ 97,308 5.67% $101,486 5.97% $ 3,085 6.58%
======== ======== ========
- -----------------------------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-----------------------------------------
AFTER TEN YEARS TOTAL
------------------- -------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
----- ----- ----- -----
(DOLLARS IN THOUSANDS)
Securities available for sale:
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government and Agency obligations . $ - - % $ 40,895 5.64%
Corporate obligations .................. 694 9.91 11,204 6.04
Collateralized mortgage obligations .... - - 47,990 6.04
------ ----------
Total debt securities ................ 694 9.91 100,089 5.87
------ ----------
Marketable equity securities (1) .......... 28,186 4.49
----------
Total securities available for sale .. 128,275 5.57
----------
Securities held to maturity:
Corporate obligations ..................... - - 101,795 5.80
Mortgage-backed securities .................. 950 6.43 1,639 7.42
------ ----------
Total securities held to maturity .... 950 6.43 103,434 5.83
------ ----------
Restricted equity securities:
Federal Home Loan Bank of Boston stock .... 5,905 6.70
Massachusetts Savings Bank Life Insurance
Company stock (1) .................... 253 4.18
Other stock ............................... 121 -
----------
Total restricted equity securities (1) 6,279 6.47
------ ----------
Total securities ..................... $1,644 7.90% $237,988 5.71%
====== =========
- -----------------------------
</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, 1999 and
1998, such loans represented 77.1% and 79.9%, 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 1997 and 1998, 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 originated in 1998 and 1999 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>
At December 31, 1999, construction and development loans amounted to
$24.7 million, $7.5 million of which had not been advanced as of that date. The
$24.7 million is comprised of $17.8 million pertaining to construction of
condominiums, $3.5 million pertaining to construction of one-to-four family
residential homes and $3.4 million pertaining to construction of commercial
properties. Different criteria are applied in underwriting construction loans
for which the primary source of repayment is the sale of the property than for
construction loans for which the primary source of repayment is the stabilized
cash flow from the completed project. For those loans where the primary source
of repayment is from resale of the property, in addition to the normal credit
analysis performed for other loans, the Bank also analyzes project costs, the
attractiveness of the property in relation to the market in which it is located
and demand within the market area. For those construction loans where the source
of repayment is the stabilized cash flow from the completed project, the Bank
analyzes not only project costs but also how long it might take to achieve
satisfactory occupancy and the reasonableness of projected rental rates in
relation to market rental rates.
Construction and development financing is generally considered to
involve a higher degree of risk than long-term financing on improved, occupied
real estate. Risk of loss on a construction loan is largely dependent upon the
accuracy of the initial estimate of construction costs, the estimated time to
sell or rent the completed property at an adequate price or rate of occupancy,
and market conditions. If the estimates and projections prove to be inaccurate,
the Bank may be confronted with a project which, upon completion, has a value
that is insufficient to assure full loan repayment.
Commercial loans increased from $13.1 million at December 31, 1998 to
$30.5 million at December 31, 1999 due in part to a $10.0 million money market
loan participation with a one year maturity and a greater volume of loans to
condominium associations for the purpose of funding capital improvements. Loans
to condominium associations amounted to $12.3 million at December 31, 1999
compared to $5.8 million at December 31, 1998.
11
<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,
------------------------------------------------------------------------------
1999 1998 1997
---------------------- ------------------------- --------------------------
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............. $ 74,889 11.13% $ 64,467 11.19% $ 68,907 14.25%
Multi-family................... 297,270 44.18 262,678 45.58 219,909 45.50
Commercial real estate......... 221,330 32.89 197,593 34.29 149,540 30.94
Construction and development... 24,719 3.67 17,255 2.99 13,382 2.77
Home equity.................... 5,800 0.86 5,505 0.96 5,276 1.09
Second......................... 16,328 2.43 13,944 2.42 15,855 3.28
--------- ------ --------- ------- -------- ------
Total mortgage loans......... 640,336 95.16 561,442 97.43 472,869 97.83
Commercial loans................. 30,514 4.54 13,051 2.26 9,074 1.88
Consumer loans................... 2,012 0.30 1,775 0.31 1,393 0.29
--------- ------ --------- ------- -------- ------
Total gross loans, excluding money
market loan participations. 672,862 100.00% 576,268 100.00% 483,336 100.00%
====== ====== ======
Less:
Unadvanced funds on loans...... (35,746) (26,096) (9,352)
Deferred loan origination fees. (1,550) (1,604) (1,562)
Unearned discounts............. (10) (10) (10)
---------- --------- --------
Total loans, excluding money
market loan participations. 635,556 548,558 472,412
Money market loan participations. 15,400 44,300 24,000
--------- --------- --------
Total loans, net $ 650,956 $ 592,858 $496,412
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------
1996 1995
-------------------------- ----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Mortgage loans:
<S> <C> <C> <C> <C>
One-to-four family............. $ 57,725 13.08% $ 56,814 13.62%
Multi-family................... 200,368 45.40 193,812 46.46
Commercial real estate......... 139,430 31.60 125,363 30.05
Construction and development... 7,261 1.65 10,288 2.47
Home equity.................... 6,398 1.45 7,420 1.78
Second......................... 19,872 4.50 17,680 4.24
--------- ----- --------- ------
Total mortgage loans......... 431,054 97.68 411,377 98.62
Commercial loans................. 9,221 2.09 4,584 1.10
Consumer loans................... 1,023 0.23 1,192 0.28
--------- ----- --------- ------
Total gross loans, excluding money
market loan participations. 441,298 100.00% 417,153 100.00%
====== ======
Less:
Unadvanced funds on loans...... (11,950) (9,879)
Deferred loan origination fees. (1,326) (1,012)
Unearned discounts............. (289) (731)
--------- ---------
Total loans, excluding money
market loan participations. 427,733 405,531
Money market loan participations. 52,950 43,100
--------- ---------
Total loans, net $ 480,683 $ 448,631
========= =========
</TABLE>
12
<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, 1999, amounted to $205.2 million).
At December 31, 1999, the largest borrower had aggregate loans outstanding of
$13.9 million, or 6.78% of core capital. Including this borrower, there were 21
borrowers each with aggregate loans outstanding at December 31, 1999 in excess
of $5.0 million, the cumulative total of which was $158.4 million, or 24.9% 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, 1999. The table does not include
prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
----------------------------------------------------------------------------------------
REAL ESTATE MORTGAGE LOANS
--------------------------------------------------------
MONEY OTHER
HOME MARKET COMMERCIAL
ONE-TO- COMMERCIAL CONSTRUCTION EQUITY AND LOAN AND
FOUR MULTI- REAL AND SECOND PARTICI CONSUMER TOTAL
FAMILY FAMILY ESTATE DEVELOPMENT MORTGAGE -PATIONS LOANS LOANS
------ ------ ------ ----------- -------- ---------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due (1):
Within one year................ $ 24,039 $ 61,204 $ 49,886 $ 15,555 $ 12,233 $ 15,400 $ 21,584 $ 199,901
-------- --------- --------- -------- -------- -------- -------- ---------
After one year:
More than one year to three years.. 27,089 45,049 28,526 - 480 - 954 102,098
More than three years to five years 21,959 114,857 81,445 1,546 961 - 3,299 224,067
More than five years to ten years. 1,683 63,882 53,113 114 902 - 292 119,986
More than ten years............ 119 2,811 3,534 - - - - 6,464
-------- --------- --------- -------- -------- -------- -------- -------
Total due after one year..... 50,850 226,599 166,618 1,660 2,343 - 4,545 452,615
-------- --------- --------- -------- -------- -------- -------- -------
Total amount due............. $ 74,889 $ 287,803 $ 216,504 $ 17,215 $ 14,576 $ 15,400 $ 26,129 652,516
======== ========= ========= ======== ======== ======== ========
Less:
Deferred loan origination fees. (1,550)
Unearned discounts............. (10)
---------
Net loans.................... $650,956
=========
</TABLE>
---------------
(1) Amounts due are net of unadvanced funds on loans.
The following table sets forth at December 31, 1999 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>
Mortgage loans:
One-to-four family................................................... $ 2,025 $ 48,825 $ 50,850
Multi-family......................................................... 94,650 131,949 226,599
Commercial real estate............................................... 79,620 86,998 166,618
Construction and development......................................... 1,660 - 1,660
Home equity and second mortgage...................................... 1,864 479 2,343
--------- --------- ---------
Total mortgage loans.............................................. 179,819 268,251 448,070
Commercial and consumer loans.......................................... 1,638 2,907 4,545
--------- --------- ---------
Total loans....................................................... $ 181,457 $ 271,158 $ 452,615
========= ========= =========
</TABLE>
13
<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,
-------------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans (1):
Mortgage loans:
One-to-four family........................................ $- $- $ 230 $ 428 $ 736
Multi-family.............................................. - - - 253 -
Commercial real estate.................................... - 297 522 646 -
Construction and development.............................. - - - 6 6
Home equity............................................... - 35 51 - -
Commercial loans.............................................. - - - - -
Consumer loans................................................ - - - 4 6
------ ------ ------ ------ ------
Total non-accrual loans................................... - 332 803 1,337 748
Other real estate owned, net (2)................................ 707 1,940 2,373 1,689 1,722
------ ------ ------ ------ ------
Total non-performing assets............................... $ 707 $2,272 $3,176 $3,026 $2,470
====== ====== ====== ====== ======
Restructured loans.............................................. $- $- $2,287 $5,438 $10,922
====== ======= ====== ====== =======
Allowance for loan losses as a percent of total loans........... 2.13% 2.21% 2.51% 2.56% 2.75%
Allowance for loan losses as a percent of total non-
performing loans (3)............................................ N.M. 3,943.98 1552.05 921.91 1,647.86
Non-performing loans as a percent of total loans................ - 0.06 0.16 0.28 0.17
Non-performing assets as a percent of total assets.............. 0.08 0.26 0.45 0.45 0.39
</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.
N.M.= not meaningful
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, 1999, other real estate owned consisted of an
industrial property carried at $633,000 and residential condominium units
carried at $160,000, net of an aggregate valuation allowance of $86,000. During
1999, the Company sold another industrial property at a gain of $465,000. For
the years ended December 31, 1999, 1998 and 1997, the Company received income,
net of expenses, of $145,000, $259,000 and $254,000, respectively, from the
rental of the industrial properties. The Company is attempting to sell the
remaining industrial property. 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 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
14
<PAGE>
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.
15
<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,
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year................ $ 13,094 $ 12,463 $ 12,326 $ 12,326 $ 12,274
Provision for loan losses................... 450 300 - - -
Charge-offs:
Mortgage loans:
One-to-four family...................... - - - - -
Multi-family............................ - - - - -
Commercial real estate.................. - - - 151 237
Construction and development............ - - - - -
Home equity............................. - - - - -
Second mortgage......................... - - - - -
Commercial loans.......................... - - - - -
Consumer loans............................ - 1 6 15 3
Money market loan participations.......... - - - - -
-------- -------- -------- -------- -------
Total charge-offs..................... - 1 6 166 240
-------- -------- -------- -------- -------
Recoveries:
Mortgage loans:
Multi-family............................ - - 25 140 271
Commercial real estate.................. 327 315 8 - 6
Construction and development............ - - 103 21 -
Commercial loans.......................... - 12 - - -
Consumer loans............................ 3 5 7 5 15
-------- -------- -------- -------- -------
Total recoveries...................... 330 332 143 166 292
-------- -------- -------- -------- -------
Net recoveries.............................. 330 331 137 - 52
-------- -------- -------- -------- -------
Balance at end of year...................... $ 13,874 $ 13,094 $ 12,463 $ 12,326 $ 12,326
======== ======== ======== ======== =======
</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,
-------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- -------------------------------
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........... $ 262 1.89% 11.13% $ 226 1.73% 11.19% $ 241 1.93% 14.25%
Multi-family.................. 4,660 33.59 44.18 3,610 27.57 45.58 2,993 24.02 45.50
Commercial real estate........ 4,526 32.62 32.89 4,214 32.18 34.29 3,376 27.09 30.94
Construction and development.. 824 5.94 3.67 526 4.02 2.99 384 3.08 2.77
Home equity................... 58 0.42 0.86 55 0.42 0.96 53 0.43 1.09
Second........................ 195 1.41 2.43 70 0.53 2.42 79 0.63 3.28
Commercial loans................. 329 2.37 4.54 379 2.89 2.26 95 0.76 1.88
Consumer loans................... 20 0.14 0.30 18 0.14 0.31 14 0.11 0.29
Money market loan participations. - - - - - - - - -
Unallocated...................... 3,000 21.62 - 3,996 30.52 - 5,228 41.95 -
------- ------- ------ ------- ------ ------ ------- ----- ------
Total allowance for loan losses $13,874 100.00% 100.00% $13,094 100.00% 100.00% $12,463 100.00% 100.00%
======= ======= ====== ======= ====== ====== ======= ====== ======
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995
------------------------------------------- -------------------------------------------
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......... $ 202 1.64% 13.08% $ 199 1.61% 13.62%
Multi-family................ 2,725 22.11 45.40 3,177 25.78 46.46
Commercial real estate...... 3,256 26.42 31.60 2,695 21.86 30.05
Construction and development 463 3.76 1.65 504 4.09 2.47
Home equity................. 64 0.52 1.45 74 0.60 1.78
Second...................... 99 0.80 4.50 133 1.08 4.24
Commercial loans.............. 110 0.89 2.09 92 0.75 1.10
Consumer loans................ 10 0.08 0.23 12 0.10 0.28
Money market loan participations - - - - - -
Unallocated................... 5,397 43.78 - 5,440 44.13 -
-------- ------ -------- -------- ------ --------
Total allowance for loan losses $ 12,326 100.00% 100.00% $ 12,326 100.00% 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, 1999, 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, 1999, loans designated as Special Mention and
Substandard totaled $1.9 million and $121,000, respectively. No loans were
designated as Doubtful or Loss. The Substandard category included three loans
secured by condominiums.
During 1999 and 1998, the allowance for loan losses was increased by
$780,000 and $631,000, respectively, as a result of net loan recoveries of
$330,000 and $331,000, respectively, and a provision for loan losses of $450,000
and $300,000, respectively. 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 $87.0 million in 1999 and $76.1
million in 1998, 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.
The decline in the unallocated portion of the allowance in 1999 and
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.
17
<PAGE>
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,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net deposits (withdrawals)..................... $ 2,055 $ (14,132) $ (23,403)
Interest credited on deposit accounts.......... 20,711 21,198 21,691
---------- ---------- ----------
Total increase (decrease) in deposit accounts.. $ 22,766 $ 7,066 $ (1,712)
========== ========== ==========
</TABLE>
18
<PAGE>
The following table sets forth the distribution of the Company's
average deposit accounts for the years indicated and the weighted average
interest rates on each category of deposits presented. Averages for the years
presented utilize average daily balances.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
---------------------------- ----------------------------
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........................................... $ 43,897 8.74% 1.23% $ 39,766 8.33% 1.55%
Savings accounts....................................... 13,010 2.59 2.22 14,510 3.04 2.45
Money market savings accounts.......................... 190,813 37.99 3.90 164,134 34.39 3.87
Non-interest-bearing demand checking accounts.......... 12,387 2.46 - 11,908 2.50 -
--------- ------- --------- -------
Total transaction deposit accounts................. 260,107 51.78 3.18 230,318 48.26 3.18
--------- ------- --------- -------
Certificate of deposit accounts:
Six months or less................................... 58,841 11.72 4.56 63,273 13.26 5.09
Over six months through 12 months.................... 104,192 20.74 4.94 103,478 21.68 5.40
Over 12 months through 24 months..................... 29,150 5.80 5.38 27,369 5.73 5.62
Over 24 months....................................... 50,005 9.96 6.09 52,850 11.07 6.25
--------- ------- --------- -------
Total certificate of deposit accounts.............. 242,188 48.22 5.14 246,970 51.74 5.51
--------- ------- --------- -------
Total average deposits............................. $ 502,295 100.00% 4.12% $ 477,288 100.00% 4.39%
========= ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------
PERCENT
OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE
------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
NOW accounts........................................... $ 37,544 7.79% 1.72%
Savings accounts....................................... 15,063 3.13 2.50
Money market savings accounts.......................... 158,578 32.90 3.85
Non-interest-bearing demand checking accounts.......... 9,890 2.05 -
--------- -------
Total transaction deposit accounts................. 221,075 45.87 3.22
--------- -------
Certificate of deposit accounts:
Six months or less................................... 67,691 14.05 5.20
Over six months through 12 months.................... 107,490 22.30 5.44
Over 12 months through 24 months..................... 28,196 5.85 5.75
Over 24 months....................................... 57,516 11.93 6.31
--------- -------
Total certificate of deposit accounts.............. 260,893 54.13 5.58
--------- -------
Total average deposits............................. $ 481,968 100.00% 4.50%
========= =======
</TABLE>
A declining interest rate environment during most of the past three
years 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 diminished
as customers 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.
At December 31, 1999, the Company had outstanding $49.5 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................................. $ 13,624 4.94%
Over three months through six months................. 11,379 5.09
Over six months through twelve months................ 11,713 5.10
Over twelve months................................... 12,814 5.62
---------
$ 49,530 5.19%
=========
</TABLE>
19
<PAGE>
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 secured by all of the Company's stock and deposits
in the FHLB and a general lien on one-to-four family mortgage loans and U.S.
Government and Agency obligations in an aggregate amount equal or up to 133% of
outstanding advances. 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, 1999, the Company had $108.8
million in outstanding advances from the FHLB and had the capacity to increase
that amount to $312.8 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,
-----------------------------------
1999 1998 1997
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Advances from the FHLB:
Average balance outstanding................................. $ 106,812 $ 78,295 $ 63,771
Maximum amount outstanding at any month end
during the year.......................................... 112,800 98,415 69,265
Balance outstanding at end of year.......................... 108,800 94,350 69,265
Weighted average interest rate during the year.............. 6.04% 6.34% 6.52%
Weighted average interest rate at end of year............... 5.91% 6.02% 6.33%
</TABLE>
RETURN ON EQUITY AND ASSETS
Return on equity and assets for the years presented is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Return on assets (net income divided by average
total assets). . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.31% 2.33% 2.02%
Return on equity (net income divided by average
stockholders' equity). . . . . . . . . . . . . . . . . . . . . . . . 7.47% 7.88% 11.19%
Dividend payout ratio (dividends declared per
share divided by net income per share) . . . . . . . . . . . . . . . 28.34% NM -
Equity to assets ratio (average stockholders'
equity divided by average total assets) . . . . . . . . . . . . . . 30.86% 29.50% 18.08%
</TABLE>
NM- not meaningful. Not presented for the period from March 24, 1998 (the date
of conversion to stock ownership) through December 31, 1998 as the dividend
payout ratio calculation for that period is not meaningful. The ratio is not
presented for the periods prior to the conversion to stock since the Bank was a
mutual savings bank and no stock was outstanding.
20
<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 owned by the Company and
the Bank. At December 31, 1999, BSC and BBS had total assets of $57.6 million
and $100.4 million, respectively, of which $56.7 million and $99.1 million,
respectively, 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, 1999.
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, 1999, BPCC had total assets of
$266.5 million, $219.4 million of which were mortgage loans originated by and
acquired from the Bank. BPCC is a 99.9% owned subsidiary of Associates.
On August 12, 1999, the Company filed an application with bank
regulators to form a wholly-owned Massachusetts-chartered stock savings bank
subsidiary which will operate as an "internet bank". The new bank will be called
LighthouseBank.com ("Lighthouse"). It is expected that Lighthouse will commence
operations in the second quarter of 2000.
PERSONNEL
As of December 31, 1999, the Company had 94 full-time employees and 13
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, its operations center in Brookline and office space in Waltham in use
by Lighthouse personnel are leased from unrelated third parties. The operations
center is used primarily to house operations and support services. At December
31, 1999, the net book value of premises and leasehold improvements was
$725,000. 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, 1999.
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
21
<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, 1999 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, 1999 appears on Page 53 of the Company's 1999
Annual Report which is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Selected Consolidated Financial Data of the Company appears on page 1
and the back of the cover page of the Company's 1999 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 18 of the Company's 1999 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 1999 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 1999 Annual Report which is incorporated
herein by reference:
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of Independent Certified Public Accountants 19
Consolidated Balance Sheets as of December 31, 1999 and 1998 20
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997 21
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1999, 1998 and 1997 22
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997 23
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997 24-25
Notes to Consolidated Financial Statements 26-51
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
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 3 through 5 of the Company's proxy statement
dated March 10, 2000 which is incorporated herein by reference.
22
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation is presented on pages 9 and 10 of the Company's
proxy statement dated March 10, 2000 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 10, 2000
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 10, 2000 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
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)**
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
23
<PAGE>
11 Statement Regarding Computation of Per Share Earnings -
Incorporated herein by reference. (See note 15 of the Notes
to Consolidated Financial Statements on page 44 of the
Company's Annual Report to Stockholders).
13 1999 Annual Report to Stockholders
21 Subsidiaries of the Registrant - This information is
presented in Item 1. Business - Subsidiary Activities of this
Report.
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 year ended December 31, 1999.
SIGNATURES
24
<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 15, 2000 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.
By: /S/ RICHARD P. CHAPMAN, JR.
------------------------------------
Richard P. Chapman, Jr., President, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: March 15, 2000
By: /S/ OLIVER F. AMES
------------------------------------
Oliver F. Ames, Director
By:____________________________________
Dennis S. Aronowitz, Director
By:____________________________________
George C. Caner, Jr., Director
By: /S/ DAVID C. CHAPIN
------------------------------------
David C. Chapin, Director
By: /S/ WILLIAM G. COUGHLIN
------------------------------------
William G. Coughlin, Director
By:____________________________________
John L. Hall, II, Director
By: /S/ CHARLES H. PECK
------------------------------------
Charles H. Peck, Director
By: /S/ PAUL R. BECHET
------------------------------------
Paul R. Bechet, Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 15, 2000
By:____________________________________
Hollis W. Plimpton, Director
By:____________________________________
Edward D. Rowley, Director
By: /S/ JOSEPH J. SLOTNIK
------------------------------------
Joseph J. Slotnik, Director
By: /S/ WILLIAM V. TRIPP, III
------------------------------------
William V. Tripp, III, Director
By:____________________________________
Rosamond B. Vaule, Director
By: /S/ PETER O. WILDE
------------------------------------
Peter O. Wilde, Director
By: /S/ FRANKLIN WYMAN, JR.
------------------------------------
Franklin Wyman, Jr., Director
25
<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 15, 2000 By:
---------------------------------------
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.
By:____________________________________
Richard P. Chapman, Jr., President, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: March 15, 2000
By:____________________________________
Oliver F. Ames, Director
By:____________________________________
Dennis S. Aronowitz, Director
By:____________________________________
George C. Caner, Jr., Director
By:____________________________________
David C. Chapin, Director
By:____________________________________
William G. Coughlin, Director
By:____________________________________
John L. Hall, II, Director
By:____________________________________
Charles H. Peck, Director
By:_____________________________________________
Paul R. Bechet, Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 15, 2000
By:____________________________________
Hollis W. Plimpton, Director
By:____________________________________
Edward D. Rowley, Director
By:____________________________________
Joseph J. Slotnik, Director
By:____________________________________
William V. Tripp, III, Director
By:____________________________________
Rosamond B. Vaule, Director
By:____________________________________
Peter O. Wilde, Director
By:____________________________________
Franklin Wyman, Jr., Director
26
<PAGE>
Exhibit 10.6
THIRD AMENDMENT
TO THE
BROOKLINE SAVINGS BANK EMPLOYEE STOCK OWNERSHIP PLAN
The Brookline Savings Bank Employee Stock Ownership Plan is hereby
amended effective November 1, 1998, unless otherwise stated in accordance with
the following:
FIRST CHANGE
Section 2, the definition of "415 Compensation" is hereby amended to
read as follows:
"415 Compensation" shall mean a Participant's wages, salaries, fees for
professional services and other amounts received (without regard to whether an
amount is paid in cash) for personal services actually rendered in the course of
employment with the Employer while a Participant in the Plan to the extent that
the amounts are includable in gross income (including, but not limited to,
commissions paid to salesmen, compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips, bonuses,
severance payments and amounts paid as a result of termination, fringe benefits,
reimbursements or other expense allowances under a nonaccountable plan (as
described in Section 1.62-2(c) of the Treasury Regulations)), any elective
deferral (as defined in Code Section 402(g)(3) and any amount which is
contributed or deferred by the employer at the election of the employee and
which is not includable in the gross income of the Employee by reason of Code
Section 125 or 457, and excluding the following:
(i) Any distributions from a plan of deferred compensation are not
considered as compensation for Code Section 415 purposes, regardless of whether
such amounts are includable in the gross income of the Employee when
distributed. However, any amounts received by an Employee pursuant to an
unfunded non-qualified plan may be considered as compensation for Code Section
415 purposes in the year such amounts are includable in the gross income of the
Employee.
(ii) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by an Employee either
becomes freely transferable or is no longer subject to a substantial risk of
forfeiture.
(iii) Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option.
(iv) Other amounts which receive special tax benefits, such as premiums
for group term life insurance (but only to the extent that the premiums are not
includable in the gross income of the Employee).
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. Such amount shall be adjusted in such manner as permitted under Code
Section 401(a)(17)(B), effective for the Plan Year which begins within the
<PAGE>
applicable calendar year. For purposes of the applicable limit, 415 Compensation
shall be prorated over short Plan Years.
SECOND CHANGE
Section 4.3, the definition of "Cash Compensation" is hereby amended to
read as follows:
"Cash Compensation" means a Participant's 415 Compensation as defined
in Section 2 of the Plan.
IN WITNESS WHEREOF, this Amendment has been adopted by the Bank as of
the 16th day of June, 1999 and executed by its duly authorized officers.
ATTEST: BROOKLINE SAVINGS BANK
- -------------------- ---------------------------
Clerk Executive Officer
<PAGE>
FOURTH AMENDMENT
TO THE
BROOKLINE SAVINGS BANK EMPLOYEE STOCK OWNERSHIP PLAN
The Brookline Savings Bank Employee Stock Ownership Plan is hereby
amended effective January 1, 2000, unless otherwise stated in accordance with
the following:
FIRST CHANGE
Section 1.4, FISCAL PERIOD, shall be amended by replacing "November 1
to October 31" with "January 1 to December 31."
SECOND CHANGE
Section 2, the definition of "ENTRY DATE," shall be amended to read as
follows:
"ENTRY DATE" means each January 1 and July 1 of each Plan Year.
THIRD CHANGE
Section 2, the definition of "PLAN YEAR" shall be amended to read as
follows:
"PLAN YEAR" means each period of 12 consecutive months beginning on
January 1 and ending on December 31.
FOURTH CHANGE
Section 3.2(b) shall be amended by replacing "November 1" with
"January 1."
FIFTH CHANGE
Section 5.1-6 shall be amended to read as follows:
A limitation year shall mean each 12 consecutive months period
beginning each January 1.
IN WITNESS WHEREOF, this Amendment has been adopted by the Bank as of
the 20th day of January, 2000 and executed by its duly authorized officers.
ATTEST: BROOKLINE SAVINGS BANK
- -------------------- ---------------------------
Clerk Executive Officer
<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,
--------------------------------------
1999 1998 1997 1996 1995
-------- ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets ............................................... $907,334 $879,027 $701,119 $666,988 $632,788
Loans, excluding money market loan participations .......... 635,556 548,558 472,412 427,733 405,531
Money market loan participations ........................... 15,400 44,300 24,000 52,950 43,100
Allowance for loan losses .................................. 13,874 13,094 12,463 12,326 12,326
Debt securities:
Available for sale ....................................... 100,089 102,934 89,620 97,007 62,691
Held to maturity ......................................... 103,434 121,390 65,444 41,620 89,342
Marketable equity securities ............................... 28,186 30,595 28,017 20,365 19,074
Deposits ................................................... 512,136 489,370 482,304 484,016 474,215
Borrowed funds ............................................. 108,800 94,350 69,265 60,565 49,665
Stockholders' equity ....................................... 274,800 278,222 132,757 113,947 100,583
Net unrealized gain on securities available for sale, net of
taxes, included in stockholders' equity .................. 7,759 14,416 13,739 8,660 7,233
Non-performing loans ....................................... -- 332 803 1,337 748
Non-performing assets ...................................... 707 2,272 3,176 3,026 2,470
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income ............................. $ 64,809 $ 61,419 $ 54,125 $ 51,019 $ 48,920
Interest expense ............................ 27,162 26,160 25,858 25,458 23,938
-------- -------- -------- -------- --------
Net interest income ....................... 37,647 35,259 28,267 25,561 24,982
Provision for loan losses.................... 450 300 -- -- --
Net interest income after provision
for loan losses ......................... 37,197 34,959 28,267 25,561 24,982
Gains on sales of securities, net ........... 7,437 2,843 74 464 877
Other real estate owned income (expense), net 711 251 238 299 (40)
Other non-interest income ................... 966 1,111 853 1,077 768
Recognition and retention plan expense ...... (3,593) -- -- -- --
Internet bank start-up expense .............. (675) -- -- -- --
Other non-interest expense .................. (9,890) (9,181) (8,374) (7,713) (7,450)
-------- -------- -------- -------- --------
Income before income taxes ................ 32,153 29,983 21,058 19,688 19,137
Provision for income taxes .................. 11,362 10,831 7,327 7,751 7,409
-------- -------- -------- -------- --------
Net income ................................ $ 20,791 $ 19,152 $ 13,731 $ 11,937 $ 11,728
======== ======== ======== ======== ========
</TABLE>
1
<PAGE>
SELECTED FINANCIAL RATIOS AND OTHER DATA OF THE COMPANY
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets ........................................ 2.31% 2.33% 2.02% 1.84% 1.91%
Return on average stockholders' equity (1) ...................... 7.81 8.36 12.21 11.95 13.42
Interest rate spread (2) ........................................ 2.69 2.76 3.08 3.10 3.37
Net interest margin (2) ......................................... 4.21 4.28 4.09 4.00 4.15
Efficiency ratio (3) ............................................ 25.15 25.07 28.45 28.15 28.02
CAPITAL RATIOS:
Stockholders' equity to total assets at end of year ............. 30.29 31.65 18.94 17.08 15.89
Tier 1 leverage capital ratio at end of year (Bank only) ........ 24.57 25.86 17.82 15.86 14.96
ASSET QUALITY RATIOS:
Non-performing assets as a percent of total assets at end of year 0.08 0.26 0.45 0.45 0.39
Allowance for loan losses as a percent of loans, excluding
money market loan participations, at end of year .............. 2.18 2.39 2.64 2.88 3.04
Allowance for loan losses as a percent of total
non-performing loans at end of year ........................... NM 3,943.98 1,552.05 921.91 1,647.86
PER SHARE DATA:
Basic earnings per common share ................................. $ 0.74 NM -- -- --
Diluted earnings per common share ............................... $ 0.74 NM -- -- --
Number of shares outstanding at
end of year (in thousands) (4) ................................ 27,743 28,595 -- -- --
Dividends per common share (5) .................................. $ 0.21 $ 0.10 -- -- --
Book value per common share at end of year ...................... $ 9.91 $ 9.73 -- -- --
Market value per common share at end of year .................... $ 9.75 $ 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 (exclusive of recognition and
retention plan expense and internet bank start-up expense) divided by the
sum of net interest income and non-interest income (exclusive of gains on
sales of securities).
(4) Common stock issued less treasury stock and unallocated common stock held
by ESOP.
(5) Three quarterly dividends of $ 0.05 each and one quarterly dividend of $
0.06 were paid in 1999. 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.
2
<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 primarily 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. On February 15, 2000, the Bank filed an
application with bank regulators to open a new retail branch in Newton,
Massachusetts. 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 as well as
one-to-four family residential 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 regulatory authorities and competition.
On August 12, 1999, the Company filed an application with bank regulators to
form a new wholly-owned Massachusetts-chartered stock savings bank subsidiary
which will operate as an "internet bank". The new bank will be called
LighthouseBank.com ("Lighthouse"). It is expected that Lighthouse will
commence operations in the second quarter of 2000. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Projected Impact of LighthouseBank.com on Future Operating
Results" and note 19 of the notes to consolidated financial statements for
information about expenses incurred to date and future operating results
expected to be realized by Lighthouse.
The following discussion contains forward-looking statements based on
management's current expectations regarding economic, 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, especially those of Lighthouse,
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, the Company's continued ability to attract and retain deposits, the
Company's ability to control costs, new accounting pronouncements and changing
regulatory requirements.
3
<PAGE>
The discussion and analysis that follows focuses on the factors affecting the
Company's consolidated financial condition at December 31, 1999 and 1998 and
consolidated results of operations during 1999, 1998 and 1997. The consolidated
financial statements and related notes appearing elsewhere in this annual report
should be read in conjunction with this review.
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 contributed to the increase in net
income in 1999 compared to 1998.
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 $28.3 million, or 3.2%, from $879.0 million at
December 31, 1998 to $907.3 million at December 31, 1999. While total asset
growth was modest, the loan portfolio (excluding money market loan
participations) increased $87.0 million, or 15.9%, from $548.6 million at
December 31, 1998 to $635.6 million at December 31, 1999. Most of the loan
growth (net of unadvanced funds) was in several segments of the portfolio.
Multi-family mortgage loans increased $32.7 million to $287.8 million,
commercial real estate mortgage loans increased $21.1 million to $216.5
million, commercial loans increased $15.6 million to $24.1 million and
one-to-four family mortgage loans increased $10.4 million to $74.9 million.
Most of the commercial loan growth was attributable to a $10 million
participation loan with a one year maturity. Loan growth was funded in part
by a reduction in money market loan participations from $44.3 million at
December 31, 1998 to $15.4 million at December 31, 1999. Generally,
participations represent purchases of a portion of loans to national
companies and organizations originated and serviced by money center banks
that mature between one day and three months. The Company views such
participations as an alternative investment to slightly lower yielding
short-term investments.
Securities available for sale and securities held to maturity amounted to
$231.7 million, or 25.5%, of total assets at December 31, 1999 and $254.9
million, or 29.0%, of total assets at December 31, 1998. These investments
were in U.S. Government and Agency obligations (1999: $40.8 million; 1998:
$92.8 million), corporate obligations (1999: $113.0 million; 1998: $124.6
million), collateralized mortgage obligations and mortgage-backed securities
(1999: $49.6 million; 1998: $6.9 million) and marketable equity securities
(1999: $28.2 million; 1998: $30.6 million). Most of the corporate and U.S.
Government and Agency obligations mature within two years. In the latter part
of 1998 and in 1999, the Company purchased collateralized mortgage
obligations with average maturities of about three years for yield
enhancement. Marketable equity securities include net unrealized gains of
$13.3 million at December 31, 1999 and $22.7 million at December 31, 1998.
The portfolio is comprised primarily of common stocks of national, regional
money center and community banks, Freddie Mac and utility companies. The
Company invests in marketable equity securities for long-term capital
appreciation and dividend yield. In 1999, the Company acquired 4.9% of the
common stock of Medford Bancorp, Inc. ("Medford"), a community bank in
Massachusetts, at a total cost of $6.3 million. The market value of the
Company's Medford stock at December 31, 1999 was $6.9 million. On November
29, 1999, the Company's application to increase its investment in Medford up
to 9.9% of Medford's common stock was approved by the Federal Reserve Board.
The approval allows the Company to purchase Medford stock through February
2000. To date, the Company has not purchased additional shares beyond those
initially purchased in 1999.
Total deposits were $512.1 million at December 31, 1999 compared to $489.4
million at December 31, 1998, an increase of $22.8 million, or 4.7%. Transaction
deposit accounts, notably in the money market savings category, increased $29.1
million, or 12.0%, while certificates of deposit declined $6.3 million, or 2.5%,
between the two dates. The economic environment, particularly in the second half
of 1999, prompted depositors to place more of their funds in accounts with
shorter maturities or immediate availability.
The Company increased its borrowings from the FHLB from $94.4 million at
December 31, 1998 to $108.8 million at December 31, 1999 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.
4
<PAGE>
Total stockholders' equity declined from $278.2 million at December 31, 1998 to
$274.8 million at December 31, 1999. The increase resulting from net income and
the issuance of shares in connection with compensation plans was more than
offset by the payment of cash dividends to stockholders and the purchase of
Company stock. During 1999, 1,378,200 shares of the Company's stock were
repurchased in the open market at an aggregate cost of $15.0 million, or $10.90
per share; 228,000 of these shares were purchased for the Recognition and
Retention Plan. The remaining 1,150,200 shares were purchased in connection with
a program approved by state bank regulators on October 20, 1998 allowing the
Company to repurchase 1,454,750 shares, or 5.0% of the total common shares
outstanding at that date. As of December 31, 1999, 1,263,700 shares have been
purchased under the plan at an aggregate cost of $14.1 million, or $11.12 per
share. No time limit has been established for completion of the program. 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, 1999, 462,600 shares have been purchased in the open
market at an aggregate cost of $5.8 million, or $12.53 per share. For the
periods ended December 31, 1999 and 1998, 34,239 and 21,143 shares,
respectively, were committed to be released to employees.
Unrealized gains on securities available for sale are reported as accumulated
other comprehensive income. Such gains amounted to $12.2 million ($7.8 million
on an after-tax basis) at December 31, 1999 and $23.2 million ($14.4 million on
an after-tax basis) at December 31, 1998. The net decrease resulted from
realization of $7.4 million ($4.5 million on an after-tax basis) of gains from
sales of marketable equity securities during 1999 and a decline in the market
value of securities that remained in the available for sale category.
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,
---------------------
1999 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Non-accrual loans:
Mortgage loans:
Commercial $ - $ 297
One-to-four family - -
Home equity - 35
------ ------
Total non-accrual loans - 332
Other real estate owned, net of allowance
for losses of $86 and $186, respectively 707 1,940
------ ------
Total non-performing assets $ 707 $2,272
====== ======
Restructured loans $ - $ -
========= ========
Allowance for loan losses $13,874 $13,094
======= =========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
------- --------
<S> <C> <C>
Allowance for loan losses as a percent
of total loans 2.13% 2.21%
Allowance for loan losses as a percent
of total loans, excluding money market
loan participations 2.18 2.39
Non-accrual loans as a percent of total loans - 0.06
Non-performing assets as a percent of
total assets 0.08 0.26
</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 $109,000 at December 31, 1999 and $1.4 million at December 31,
1998. 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 1999 and 1998, the Company charged off loans amounting to $0 and $1,000,
respectively, and recovered $330,000 and $332,000, 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 $450,000 charged to earnings in 1999 and $300,000
in 1998. Management deemed it prudent to increase the allowance in light of the
$87.0 million and $76.1 million increase in net loans outstanding (exclusive of
money market loan participations) in 1999 and 1998, respectively, 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.
In March 1999, four federal banking agencies and the Securities and Exchange
Commission announced they had formed a working group to come up with new
guidelines for the documentation, disclosure and reporting of bank loan loss
reserves because of "continued uncertainty among financial institutions as to
the expectations of the banking and securities regulators" on how banks should
calculate and report loan loss reserves. In 2000, the working group expects to
issue guidance regarding (1) the procedures necessary for a reasoned assessment
of losses inherent in a loan portfolio, (2) documentation that should exist to
support the allowance and (3) enhanced disclosure of credit loss allowances,
including changes in risk factors and asset quality that affect allowances for
credit losses. It is not possible at this time to anticipate what effect, if
any, guidelines developed by the working group will have on the financial
condition or operating results of the Company.
6
<PAGE>
AVERAGE BALANCE SHEETS AND INTEREST RATES
The following table sets forth certain information relating to the Company for
the years ended December 31, 1999, 1998 and 1997. 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,
-----------------------------------------------------------------------------------
1999 1998 1997
-------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST(1) COST BALANCE INTEREST(1) COST BALANCE INTEREST(1) COST
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Short-term investments....... $12,809 $ 634 4.95% $ 38,585 $2,104 5.45% $ 9,657 $ 522 5.41%
Debt securities (2).......... 220,749 12,795 5.80 204,489 12,109 5.92 147,282 8,873 6.02
Equity securities (2)........ 38,144 1,564 4.10 33,196 1,221 3.68 26,255 1,196 4.56
Mortgage loans (3)(4)........ 577,461 46,928 8.13 493,737 42,743 8.66 441,625 39,648 8.98
Money market loan
participations............. 29,618 1,539 5.20 39,520 2,239 5.67 43,631 2,491 5.71
Other commercial loans (3)... 16,255 1,254 7.71 7,495 647 8.63 6,201 625 10.08
Consumer loans (3)........... 1,922 181 9.42 1,680 167 9.94 1,176 122 10.37
------- ------ -------- ------ -------- ------
Total interest-earning
assets................... 896,958 64,895 7.24 818,702 61,230 7.48 675,827 53,477 7.91
------ ------- ------ -------- ------ -------
Allowance for loan losses...... (13,441) (12,613) (12,428)
Non-interest earning assets.... 17,867 17,519 15,419
------- -------- --------
Total assets.............. $901,384 $823,608 $678,818
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:....................
NOW accounts.............. $43,897 $ 542 1.23% $ 39,766 $ 617 1.55% $ 37,544 $ 645 1.72%
Savings accounts (5)...... 13,010 289 2.22 14,510 356 2.45 15,063 377 2.50
Money market savings
accounts................ 190,813 7,434 3.90 164,134 6,350 3.87 158,578 6,109 3.85
Certificate of deposit
accounts................ 242,188 12,443 5.14 246,970 13,601 5.51 260,893 14,569 5.58
------- ------ ------- ------ ------- ------
Total deposits.......... 489,908 20,708 4.23 465,380 20,924 4.50 472,078 21,700 4.60
Borrowed funds............... 106,812 6,454 6.04 78,295 4,961 6.34 63,771 4,158 6.52
------- ------ -------- ------ -------- ------
Total deposits and
borrowed funds........ 596,720 27,162 4.55 543,675 25,885 4.76 535,849 25,858 4.83
Stock offering proceeds - - - 11,000 275 2.50 - - -
------- ------ -------- ------ ------ ------
Total interest-bearing
liabilities........... 596,720 27,162 4.55 554,675 26,160 4.72 535,849 25,858 4.83
-------- ------ -------- ------ ------- -----
Non-interest-bearing demand
checking accounts........... 12,387 11,908 9,890
Other liabilities.............. 14,069 14,075 10,343
------- -------- --------
Total liabilities....... 623,176 580,658 556,082
Stockholders' equity........... 278,208 242,950 122,736
------- -------- --------
Total liabilities and
stockholders' equity... $901,384 $823,608 $ 678,818
======== ======== ========
Net interest income (tax equivalent
basis)/interest
rate spread (6).............. 37,733 2.69% 35,070 2.76% 27,619 3.08%
===== ===== =====
Less adjustment of tax exempt income 318 255 260
------- ----- -------
Net interest income (4)........ $37,415 $34,815 $27,359
======= ======= =======
Net interest margin (7)........ 4.21% 4.28% 4.09%
===== ===== =====
</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 average balances.
(4) Excluded from interest income for the years ended December 31, 1999, 1998
and 1997 is $232, $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, 1999, 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.
7
<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 3.08% in 1997 to 2.76% in 1998 and 2.69% in 1999. The
more significant reduction in 1998 resulted from the mix of interest-earning
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 and the first half of 1999 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 4.09% in 1997 to 4.28% in 1998 and declined to 4.21% in 1999.
Despite reduced interest rate spreads, net interest margin climbed higher in
1998 as a result of a greater percent of interest-earning assets being funded by
cost-free stockholders' equity (18.2% in 1997 compared to 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 that environment resulted in further reduction of the Company's
net interest margin to 4.20% in the first quarter of 1999 and 4.14% in the
second quarter of 1999. Three 25 basis point increases in the Federal Reserve
discount rate in the second half of 1999 contributed to an improvement in net
interest margin to 4.20% in the third quarter of 1999 and 4.30% in the fourth
quarter of 1999.
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 Company'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, 1999 DECEMBER 31, 1998
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- ---------------------------------------
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.................... $ (1,290) $ (181) $ (1,471) $ 1,577 $ 5 $ 1,582
Debt securities........................... 947 (260) 687 3,390 (154) 3,236
Equity securities......................... 194 149 343 281 (256) 25
Mortgage loans............................ 6,922 (2,737) 4,185 4,550 (1,455) 3,095
Money market loan participations.......... (526) (174) (700) (233) (19) (252)
Other commercial loans.................... 682 (75) 607 119 (97) 22
Consumer loans............................ 23 (9) 14 50 (5) 45
--------- --------- -------- --------- -------- -------
Total interest income.................. 6,952 (3,287) 3,665 9,734 (1,981) 7,753
--------- --------- -------- --------- -------- -------
Interest expense:
Deposits:
NOW accounts........................... 60 (135) (75) 37 (65) (28)
Savings accounts....................... (35) (32) (67) (14) (7) (21)
Money market savings accounts.......... 1,039 45 1,084 215 26 241
Certificate of deposit accounts........ (259) (899) (1,158) (769) (199) (968)
---------- --------- --------- --------- -------- -------
Total deposits..................... 805 (1,021) (216) (531) (245) (776)
Borrowed funds............................ 1,733 (240) 1,493 923 (120) 803
Stock offering proceeds................... (275) - (275) 275 - 275
---------- -------- --------- --------- -------- -------
Total interest expense............. 2,263 (1,261) 1,002 667 (365) 302
--------- --------- -------- --------- -------- -------
Net change in net interest income............ $ 4,689 $ (2,026) $ 2,663 $ 9,067 $ (1,616) $ 7,451
========= ========= ======== ========= ======== ========
</TABLE>
8
<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 the 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>
+200 over one year........... (5.69)%
Base Case.................. -
-200 over one year........... (0.95)%
</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 100 basis points and money market savings
accounts by 142 basis points. There can be no assurance that the assumptions
used will be validated in 2000.
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.
9
<PAGE>
The table below shows the Company's interest rate sensitivity gap position as of
December 31, 1999. 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, 1999
-----------------------------------------------------------------------------------------
MORE MORE MORE
MORE MORE THAN THAN THAN
THAN ONE THAN TWO THREE FOUR FIVE
ONE YEAR TO YEARS TO YEARS YEARS YEARS MORE
YEAR TWO THREE TO FOUR TO FIVE TO TEN THAN
OR LESS YEARS YEARS YEARS YEARS YEARS TEN YEARS TOTAL
------- ----- ----- ----- ----- ----- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS (1):
Short-term investments ....... $ 9,435 $ -- $ -- $ -- $ -- $ -- $ -- $ 9,435
Weighted average rate ....... 5.35%
Debt and equity securities (2) 108,542 56,353 10,574 12,180 6,775 12,140 1,533 208,097
Weighted average rate ....... 5.74% 5.87% 5.87% 5.96% 5.95% 5.83% 5.83%
Mortgage loans (3) ........... 211,239 77,766 79,103 97,231 78,037 65,979 1,632 610,987
Weighted average rate ....... 8.44% 7.75% 7.82% 7.90% 7.86% 7.89% 9.25%
Money market loan
participations .............. 15,400 -- -- -- -- -- -- 15,400
Weighted average rate ....... 5.65%
Other loans .................. 20,146 2,485 1,131 1,351 896 119 -- 26,128
Weighted average rate ....... 7.89% 8.77% 9.43% 9.20% 9.10% 9.10%
------- ---------- --------- ---------- --------- --------- ------- -------
Total interest-earning assets 364,762 136,604 90,808 110,762 85,708 78,238 3,165 870,047
Weighted average rate ....... 7.41% 6.99% 7.61% 7.70% 7.72% 7.57% 7.59%
------- ---------- --------- ---------- --------- --------- ------- -------
INTEREST-BEARING LIABILITIES:
NOW accounts............. 46,970 -- -- -- -- -- -- 46,970
Weighted average rate... 1.25%
Savings accounts (4)..... 12,314 -- -- -- -- -- -- 12,314
Weighted average rate... 2.25%
Money market savings
accounts................ 198,863 -- -- -- -- -- -- 198,863
Weighted average rate... 3.92%
Certificate of deposit
accounts................ 183,738 38,364 12,322 3,565 3,770 -- -- 241,759
Weighted average rate... 5.05% 5.46% 5.69% 5.82% 5.80%
Borrowed funds........... 9,400 9,350 11,300 30,750 32,000 16,000 -- 108.800
Weighted average rate... 6.24% 6.66% 6.53% 5.29% 5.91% 6.03%
------- ------- ------- ------- ------- ------ ------- -------
Total interest-bearing
liabilities............. 451,285 47,714 23,622 34,315 35,770 16,000 -- 608.706
Weighted average rate... 4.10% 5.69% 6.09% 5.35% 5.90% 6.03%
------- ------- ------- ------- ------- ------ ------- -------
Interest sensitivity gap (5) (86,523) 88,890 67,186 76,447 49,938 62,238 3,165 261,341
Impact of interest rate swap 5,000 -- -- -- -- (5,000) -- --
Weighted average rate... 6.17% 5.94%
------- ------- ------- ------- ------- ------ ------- -------
Adjusted interest sensitivity
gap....................... $ (81,523) $88,890 $67,186 $76,447 $49,938 $57,238 $3,165 $261,341
========== ======= ======= ======= ======= ======= ====== ========
Cumulative interest
sensitivity gap........... $ (81,523) $ 7,367 $74,553 $151,000 $200,938 $258,176 $261,341
======== ======= ======= ======== ======== ======== ========
Cumulative interest sensitivity
gap as a percentage of
total assets.............. (8.98)% 0.81% 8.22% 16.64% 22.15% 28.45% 28.80%
Cumulative interest sensitivity
gap as a percentage of total
interest-earning assets.... (9.37)% 0.85% 8.57% 17.36% 23.10% 29.67% 30.04%
</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 $3.5 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.
10
<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 and to $60.4 million, or 6.7% of total
assets, at December 31, 1999. The increases resulted from having a significant
part of the Company's loan originations and refinancings (notably in the second
half of 1998 and the first half of 1999) 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 and
1999 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 continue to
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, 1999 are equity securities with a market value of $28.2 million. Included in
that amount are net unrealized gains of $13.3 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, 1999 AND
DECEMBER 31, 1998
GENERAL. Net income for the year ended December 31, 1999 was $20.8 million
($0.74 per share) compared to $19.2 million (per share data not applicable since
the Company converted to stock on March 24, 1998), an increase of $1.6 million,
or 8.6%. Included in 1999 were $7.4 million of gains from sales of marketable
equity securities compared to $2.8 million of gains from sales of marketable
equity securities in 1998. 1999 operating results also included expenses of $3.6
million related to the Recognition and Retention Plan approved by the Company's
stockholders on April 15, 1999 and $675,000 related to the start-up of the new
internet bank subsidiary (Lighthouse). Excluding these particular items of
income and expense on an after-tax basis, net income was $18.7 million in 1999
compared to $17.4 million in 1998, an increase of $1.3 million, or 7.4%.
INTEREST INCOME. The average balance of interest-earning assets increased $78.3
million, or 9.6%, from $818.7 million in 1998 to $897.0 million in 1999. The
average balance of loans (excluding money market loan participations) increased
$92.7 million, or 18.4%, in 1999 compared to 1998 and accounted for 66.4% of
total interest-earning assets in 1999 compared to 61.4% in 1998. Upon the
conversion to stock in March 1998, the Company invested much of the conversion
proceeds in short-term investments and investment securities with relatively
short maturities. As a result, loans (excluding money market loan
participations) represented only 59.3% of total interest-earning assets shortly
after the conversion. Since then, the Company has sought to increase the percent
of total interest-earning assets represented by loans since loans generate a
higher yield than short-term investments and investment securities.
Interest income on loans, excluding interest on money market loan participations
and $232,000 in 1999 and $444,000 in 1998 of interest collected on non-accrual
loans but earned in prior years, was $48.4 million in 1999 compared to $43.6
million in 1998, an increase of $4.8 million, or 11.0%. The $7.6 million of
additional income resulting from the 18.4% increase in average loans outstanding
(excluding money market loan participations) was partially offset by a $2.8
million decline in interest income resulting from the average rate earned on
loans (excluding money market loan participations) decreasing from 8.66% in 1998
to 8.12% in 1999. The reduction in yield was attributable to a falling interest
rate environment. Historically, part of the Company's loan portfolio has been
priced at adjustable rates tied to a published prime rate. Cuts in the prime
rate during the latter part of 1998 caused a decline in the yield on the
Company's adjustable rate loans and prompted some multi-family and commercial
real estate borrowers to convert their loans to fixed rate pricing for several
years. Additionally, a significant part of new loan production in the second
half of 1998 and the first half of 1999 was originated at prevailing market
rates for fixed periods averaging five to seven years. If interest rates
increase during the fixed rate phase of these new loans, net interest income
could be negatively affected.
11
<PAGE>
The average balance invested in money market loan participations in 1999 and
1998 were $29.6 million and $39.5 million, respectively, and the yields earned
on those balances were 5.20% and 5.67%, respectively.
Interest income on short-term investments decreased 69.9% from $2.1 million in
1998 to $634,000 in 1999 as a result of substantially reduced average balances
in such investments ($38.6 million in 1998 compared to $12.8 million in 1999)
and a reduction in yields from 5.45% in 1998 to 4.95% in 1999. Interest income
on debt securities increased 5.7% from $12.1 million in 1998 to $12.8 million in
1999. The average balances invested in debt securities increased 8.0% from
$204.5 million in 1998 to $220.7 million in 1999 and the yields earned on such
securities were 5.92% and 5.80% in the comparable periods.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1999 was
$27.2 million compared to $26.2 million for the year ended December 31, 1998, an
increase of $1.0 million, or 3.8%. Interest paid on deposits (excluding interest
paid in connection with the stock offering) was $216,000, or 1.0% less in 1999
than in 1998, despite a $24.5 million, or 5.3% increase in total average
deposits in 1999 compared to 1998. The declining interest rate environment
resulted in higher transaction account balances. Rates paid on such balances are
lower than on certificates of deposit with extended maturities. The average rate
paid on deposits declined from 4.50% in 1998 to 4.23% in 1999.
The Company increased its average borrowings from the FHLB from $78.3 million in
1998 to $106.8 million in 1999 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 6.34% in 1998 to 6.04% in 1999.
PROVISION FOR LOAN LOSSES. The Company provided $450,000 for loan losses in 1999
and $300,000 in 1998. As previously discussed, the provisions were made in light
of the significant growth in the higher risk categories of the loan portfolio.
NON-INTEREST INCOME. Non-interest income increased from $4.2 million in 1998 to
$9.1 million in 1999 primarily as a result of greater gains from sales of
marketable equity securities ($7.4 million in 1999 compared to $2.8 million in
1998). Most of the gains resulted from the Company's decision to reduce the
extent of its stock holdings of selected national financial institution
organizations. The Company also realized income of $711,000 in 1999 and $251,000
in 1998 from other real estate owned. The increase resulted primarily from the
sale of a foreclosed property. Service fees and charges, which comprise the
remainder of non-interest income, were lower in 1999 than in 1998 as a result of
a $262,000 decline in fees from loan prepayments, penalties and commitments.
Partially offsetting that decline was an $80,000 increase in deposit fees
resulting from pricing changes and better account monitoring and $43,000
representing the Company's equity interest in a property sold by a loan
customer.
NON-INTEREST EXPENSE. Included in non-interest expense in 1999 is $3.6 million
relating to the Company's Recognition and Retention Plan and $675,000 relating
to the start-up of a new internet bank subsidiary. Refer to notes 12 and 19 of
the notes to consolidated financial statements presented elsewhere in this
report for information about those expenses. Excluding those expenses, total
non-interest expense increased $709,000, or 7.7%, from $9.2 million in 1998 to
$9.9 million in 1999. Most of the increase resulted from higher compensation and
employee benefits expense caused by additional personnel relating primarily to
lending activities and a larger provision for the Company's employee stock
ownership plan ("ESOP"). The ESOP, which went into effect in the second quarter
of 1998, resulted in expense of $377,000 in 1999 compared to $291,000 in 1998.
Also contributing to the higher level of expense in 1999 were increased costs
attributable to being a public company, increased depreciation expense resulting
from upgrades of computer equipment and increased marketing costs. Offsetting
some of these increases was the non-recurrence of $130,000 of costs related to
Year 2000 compliance expended in 1998.
INCOME TAXES. The effective rate of income taxes was 35.3% in 1999 compared to
36.1% in 1998. Both years benefitted from low state income taxes resulting from
the existence of a real estate investment subsidiary and utilization of
investment security subsidiaries.
12
<PAGE>
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.
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 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
13
<PAGE>
$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 systems. 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.
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. In 1999, the Company repaid advances of $26.9 million and
obtained new advances of $41.4 million while, in 1998, the Company repaid
advances of $24.9 million and obtained new advances of $50.0 million. Total
advances outstanding at December 31, 1999 amounted to $108.8 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, 1999, such assets amounted to $81.0
million, or 8.9% of total assets.
At December 31,1999, the Company and the Bank exceeded all regulatory capital
requirements. The Bank's Tier I capital was $205.2 million, or 24.6% of adjusted
assets. The minimum required Tier I capital ratio is 4.00%.
PROJECTED IMPACT OF LIGHTHOUSEBANK.COM ON FUTURE OPERATING RESULTS
As stated in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - General" and note 19 of the notes to consolidated
financial statements, the Company filed an application with bank regulators
on August 12, 1999 to form a new subsidiary that will operate as an "internet
bank". The new bank will be called LighthouseBank.com ("Lighthouse"). The
Company is hopeful that Lighthouse will commence offering products and
services to the public in the second quarter of 2000. Establishment of this
new subsidiary bank is viewed as a strategic initiative that should provide a
meaningful way to leverage part of the capital that was raised in the
Offering in March 1998.
During 1999, the Company incurred expenses of $675 in connection with the
formation and start-up of Lighthouse. While it is expected that Lighthouse
will make a long-term contribution to the successful performance of the
Company, it will likely incur after-tax operating losses in the range of
$2.7 million to $3.2 million in 2000 and $2.0 million to $2.3 million in
2001. These amounts include start-up expenses that will continue in 2000
until regulatory approvals are obtained and Lighthouse is ready to conduct
business, as well as foregone income on the Company's contemplated $25
million capital contribution in Lighthouse. These estimates are subject to
risks and uncertainties that could cause actual results to differ materially.
Factors that might cause such a difference include, but are not limited to,
general economic conditions, changes in interest rates, regulatory
considerations, competition, technological developments, recruitment of
qualified personnel and market acceptance of Lighthouse's pricing, products
and services.
YEAR 2000 ("Y2K") MATTERS
Throughout 1999 and 1998, the Company carried out a comprehensive process to
minimize the possibility of problems arising in data processing and other
date-sensitive systems, a problem known as the Year 2000 or Y2K dilemma. The
Company's efforts were monitored by its banking regulators. The Company did not
encounter any significant problems in connection with the processing of
transactions subsequent to December 31, 1999.
The Company expensed $130,000 during 1998 and a considerably lesser amount in
1999 to become Y2K compliant.
NEW ACCOUNTING PRONOUNCEMENTS
See note 1 of the notes 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.
14
<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, 1999 and 1998,
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, 1999. 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, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Boston, Massachusetts
January 20, 2000
15
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks ................................................ $ 8,203 $ 6,657
Short-term investments ................................................. 9,435 22,660
Securities available for sale .......................................... 128,275 133,529
Securities held to maturity (market value of $102,451
and $122,043, respectively) .......................................... 103,434 121,390
Restricted equity securities ........................................... 6,279 5,174
Loans, excluding money market loan participations ...................... 635,556 548,558
Money market loan participations ....................................... 15,400 44,300
Allowance for loan losses .............................................. (13,874) (13,094)
--------- ---------
Net loans ........................................................... 637,082 579,764
--------- ---------
Other investment ....................................................... 3,022 --
Accrued interest receivable ............................................ 5,811 6,457
Bank premises and equipment, net ....................................... 1,535 1,184
Other real estate owned, net ........................................... 707 1,940
Deferred tax asset ..................................................... 3,226 --
Other assets ........................................................... 325 272
--------- ---------
Total assets ........................................................ $ 907,334 $ 879,027
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ............................................................... $ 512,136 $ 489,370
Borrowed funds ......................................................... 108,800 94,350
Mortgagors' escrow accounts ............................................ 3,624 3,308
Income taxes payable ................................................... 898 5,843
Deferred income tax liability, net ..................................... -- 2,045
Accrued expenses and other liabilities ................................. 7,076 5,889
--------- ---------
Total liabilities ................................................... 632,534 600,805
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized,
none issued ......................................................... -- --
Common stock, $0.01 par value; 45,000,000 shares authorized,
29,641,500 and 29,095,000 shares issued, respectively ............... 296 291
Additional paid-in capital ........................................... 140,355 134,490
Retained earnings .................................................... 150,098 135,282
Accumulated other comprehensive income ............................... 7,759 14,416
Treasury stock, at cost - 1,491,700 and 113,500 shares, respectively . (16,334) (1,316)
Unearned compensation- recognition and retention plan ................ (2,316) --
Unallocated common stock held by ESOP - 407,218
and 386,457 shares, respectively .................................. (5,058) (4,941)
--------- ---------
Total stockholders' equity ..................................... 274,800 278,222
--------- ---------
Total liabilities and stockholders' equity ..................... $ 907,334 $ 879,027
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
16
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans, excluding money market loan participations .... $ 48,595 $44,001 $41,303
Money market loan participations ..................... 1,539 2,239 2,491
Debt securities ...................................... 12,795 12,109 8,873
Marketable equity securities ......................... 877 695 715
Restricted equity securities ......................... 369 271 220
Short-term investments ............................... 634 2,104 523
----------- ------- -------
Total interest income ............................. 64,809 61,419 54,125
----------- ------- -------
Interest expense:
Deposits ............................................. 20,708 21,199 21,700
Borrowed funds ....................................... 6,454 4,961 4,158
----------- ------- -------
Total interest expense ............................ 27,162 26,160 25,858
----------- ------- -------
Net interest income .................................... 37,647 35,259 28,267
Provision for loan losses .............................. 450 300 --
----------- ------- -------
Net interest income after provision for loan losses 37,197 34,959 28,267
----------- ------- -------
Non-interest income:
Fees and charges ..................................... 868 1,095 792
Gains on sales of securities, net .................... 7,437 2,843 74
Other real estate owned income, net .................. 711 251 238
Other income ......................................... 98 16 61
----------- ------- -------
Total non-interest income ......................... 9,114 4,205 1,165
----------- ------- -------
Non-interest expense:
Compensation and employee benefits ................... 6,153 5,722 5,081
Recognition and retention plan ....................... 3,593 -- --
Occupancy ............................................ 707 694 701
Equipment and data processing ........................ 1,172 1,186 1,116
Advertising and marketing ............................ 504 410 338
Deposit insurance premiums ........................... 71 70 71
Internet bank start-up ............................... 675 -- --
Other ................................................ 1,283 1,099 1,067
----------- ------- -------
Total non-interest expense ........................ 14,158 9,181 8,374
----------- ------- -------
Income before income taxes ............................. 32,153 29,983 21,058
Provision for income taxes ............................. 11,362 10,831 7,327
----------- ------- -------
Net income ........................................ $ 20,791 $19,152 $13,731
=========== ======= =======
Basic and diluted earnings per share ................... $ 0.74 NM --
Weighted average common shares outstanding-basic
and diluted ....................................... 28,016,150 NM --
</TABLE>
See accompanying notes to the consolidated financial statements.
17
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income ....................................................... $ 20,791 $19,152 $13,731
-------- ------- -------
Other comprehensive income, net of taxes:
Unrealized holding gains (losses) ............................. (3,533) 4,007 8,424
Income tax expense (benefit) .................................. (1,422) 1,617 3,297
-------- ------- -------
Net unrealized holding gains (losses)....................... (2,111) 2,390 5,127
-------- ------- -------
Less reclassification adjustment for gains included in net income:
Realized gains ................................................ 7,437 2,843 74
Income tax expense ............................................ 2,891 1,130 26
-------- ------- -------
Net reclassification adjustment ............................ 4,546 1,713 48
-------- ------- -------
Total other comprehensive income (loss) .................... (6,657) 677 5,079
-------- ------- -------
Comprehensive income ............................................. $ 14,134 $19,829 $18,810
======== ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
UNALLOCATED
ACCUMULATED UNEARNED COMMON
ADDITIONAL OTHER COMPENSATION - STOCK TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY RECOGNITION AND HELD BY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME STOCK RETENTION PLAN ESOP EQUITY
--------- --------- ---------- ------------ ------ --------- ---- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 . $ -- $ -- $ 105,287 $ 8,660 $ -- $-- $ -- $ 113,947
Net income ................... -- -- 13,731 -- -- -- -- 13,731
Unrealized gain on securities
available for sale, net of
reclassification adjustment -- -- -- 5,079 -- -- -- 5,079
------- --------- --------- ------- ------- --- ------- ---------
Balance at December 31, 1997 . -- -- 119,018 13,739 -- -- -- 132,757
Net income ................... -- -- 19,152 -- -- -- -- 19,152
Unrealized gain on securities
available for sale, net of
reclassification adjustment -- -- -- 677 -- -- -- 677
Net proceeds of stock offering
and issuance of common
stock (29,095,000 shares) . 291 134,499 -- -- -- -- -- 134,790
Common stock dividend of
$0.10 per share ........... -- -- (2,888) -- -- -- -- (2,888)
Treasury stock purchases
(113,500 shares) .......... -- -- -- -- (1,316) -- -- (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) ........... -- (9) -- -- -- -- 307 298
------- --------- --------- ------- ------- --- ------- ---------
Balance at December 31, 1998 . $ 291 $ 134,490 $ 135,282 $14,416 $(1,316) $-- $(4,941) $ 278,222
------- --------- --------- ------- ------- --- ------- ---------
</TABLE>
Continued
19
<PAGE>
<TABLE>
<CAPTION>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
UNALLOCATED
ACCUMULATED UNEARNED COMMON
ADDITIONAL OTHER COMPENSATION - STOCK TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY RECOGNITION AND HELD BY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME STOCK RETENTION PLAN ESOP EQUITY
--------- --------- ---------- ------------ ------ --------- ---- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 ......... $291 $ 134,490 $ 135,282 $ 14,416 $ (1,316) $ -- $(4,941) $ 278,222
Net income ........................... -- -- 20,791 -- -- -- -- 20,791
Unrealized loss on securities
available for sale, net of
reclassification adjustment ....... -- -- -- (6,657) -- -- -- (6,657)
Common stock dividends
of $0.21 per share ................ -- -- (5,975) -- -- -- -- (5,975)
Treasury stock purchases
(1,378,200 shares) ................ -- -- -- -- (15,018) -- -- (15,018)
Common stock issued in
conjunction with the recognition
and retention plan (546,500 shares) 5 5,904 -- -- -- (5,909) -- --
Compensation under recognition
and retention plan ................ -- -- -- -- -- 3,593 -- 3,593
Common stock acquired by ESOP
(55,000 shares) ................... -- -- -- -- -- -- (549) (549)
Common stock held by ESOP
committed to be released
(34,239 shares) ................... -- (39) -- -- -- -- 432 393
---- --------- --------- -------- -------- ------- ------- ---------
Balance at December 31, 1999 ......... $296 $ 140,355 $ 150,098 $ 7,759 $(16,334) $(2,316) $(5,058) $ 274,800
==== ========= ========= ======== ======== ======= ======= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
20
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .............................................. $ 20,791 $ 19,152 $ 13,731
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses ............................ 450 300 --
Reduction in valuation allowance for other real estate
owned .............................................. (100) -- --
Depreciation and amortization ........................ 544 462 450
Amortization, net of accretion, of securities premiums
and discounts ...................................... 1,632 1,021 633
Accretion of deferred loan origination fees
and unearned discounts ............................. (522) (529) (592)
Net gains from sales of securities ................... (7,465) (2,843) (74)
Valuation write-down of securities ................... 28 -- --
Net gains from sales of other real estate owned ...... (465) (22) (12)
Equity interest in earnings of other investment ...... (21) -- --
Compensation under recognition and retention plan .... 3,593 -- --
Deferred income taxes ................................ (1,019) (482) (302)
Release of ESOP shares ............................... 393 298 --
(Increase) decrease in:
Accrued interest receivable ........................ 646 (1,217) (134)
Other assets ....................................... (53) 609 (202)
Increase (decrease) in:
Income taxes payable ............................... (4,884) (58) 4,450
Accrued expenses and other liabilities ............. 1,187 (66) 1,671
-------- --------- --------
Net cash provided from operating activities ...... 14,735 16,625 19,619
-------- --------- --------
Cash flows from investing activities:
Proceeds from sales of securities available for sale .... 8,234 3,687 752
Proceeds from redemptions and maturities of securities
available for sale ..................................... 48,211 47,858 50,956
Proceeds from redemptions and maturities of securities
held to maturity ....................................... 47,941 21,252 21,693
Purchase of securities available for sale ............... (55,031) (63,652) (43,651)
Purchase of securities held to maturity ................. (31,310) (77,998) (46,049)
Purchase of Federal Home Loan Bank of Boston stock ...... (1,074) (1,453) (240)
Purchase of other restricted equity securities .......... (31) -- --
Net increase in loans ................................... (90,896) (76,977) (45,883)
Funding of other investment ............................. (3,001) -- --
Proceeds from sales of participations in loans .......... 4,750 1,691 1,198
Purchase of bank premises and equipment ................. (861) (251) (344)
Capital expenditures on other real estate owned ......... (30) (129) (88)
Proceeds from sales of other real estate owned .......... 1,794 550 158
-------- --------- --------
Net cash used for investing activities .............. (71,304) (145,422) (61,498)
-------- --------- --------
</TABLE>
(Continued)
21
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Cash flows from financing activities:
Increase in demand deposits and NOW, savings and
money market savings accounts ........................ $ 29,061 $ 15,097 $ 3,982
Decrease in certificates of deposit ................... (6,295) (8,031) (5,694)
Proceeds from Federal Home Loan Bank of Boston advances 41,361 49,950 25,792
Repayment of Federal Home Loan Bank of Boston advances (26,911) (24,865) (17,092)
Increase in mortgagors' escrow accounts ............... 316 412 119
Net proceeds from issuance of common stock ............ -- 134,790 --
Purchase of common stock for ESOP ..................... (549) (5,248) --
Purchase of treasury stock ............................ (15,018) (1,316) --
Payment of common stock dividends ..................... (5,975) (2,888) --
-------- --------- --------
Net cash provided from financing activities .... 15,990 157,901 7,107
-------- --------- --------
Net increase (decrease) in cash and cash equivalents .... (40,579) 29,104 (34,772)
Cash and cash equivalents at beginning of year .......... 73,617 44,513 79,285
-------- --------- --------
Cash and cash equivalents at end of year ................ $ 33,038 $ 73,617 $ 44,513
======== ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds .............. $ 27,115 $ 26,039 $ 25,813
Income taxes ......................................... 17,250 11,363 3,309
Non-cash activities:
Transfers from loans to other real estate owned ...... -- -- 728
</TABLE>
See accompanying notes to the consolidated financial statements.
22
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(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. These activities represent the Company's only operating segment for
financial reporting purposes. 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.
23
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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 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.
24
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
OTHER INVESTMENT
On September 30, 1999, the Company acquired a 30.5% ownership interest in
Eastern Funding, LLC ("Eastern"), a Delaware chartered limited liability
corporation formed on July 7, 1997. Eastern is based in New York, New York and
specializes primarily in the financing of coin operated laundry and dry cleaning
equipment in the greater metropolitan New York area and selected other locations
in the Northeast. The Company accounts for this investment under the equity
method of accounting and includes its share of Eastern's operating results in
other income.
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 recognizes the compensation cost of pension and postretirement
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. Actuarial gains and losses that arise from changes in assumptions
concerning future events used in estimating pension costs are amortized over a
period that reflects the long-term nature of pension expense.
STOCK-BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation", the Company adheres to Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", in
accounting for its stock option plans and discloses in the footnotes to the
financial statements pro forma net income and earnings per share information as
if the fair value based method had been adopted.
Deferred compensation for shares awarded under the Recognition and Retention
Plan is recorded as a reduction of stockholders' equity. Compensation expense is
recognized over the vesting period of shares awarded based upon the fair value
of the shares at the award date.
Compensation expense for the Employee Stock Ownership Plan ("ESOP") is recorded
at an amount equal to the shares allocated by the ESOP multiplied by the average
fair market value of the shares during the year.
25
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
The Company recognizes compensation expense ratably over the year for the ESOP
shares to be allocated based upon the Company's current estimate of the number
of shares expected to be allocated by the ESOP during each calendar year. The
difference between the average fair market value and the cost of the shares
allocated by the ESOP is recorded as an adjustment to additional
paid-in-capital.
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 reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company.
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.
TREASURY STOCK
Common stock shares repurchased are recorded as treasury stock at cost.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement, which became effective for fiscal years beginning after June 15,
1999, establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. This Statement must be adopted prospectively and retroactive
application is not permitted. 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. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133". SFAS No. 133 is now effective for fiscal years
beginning after June 15, 2000. The Company expects to adopt SFAS No. 133 on
January 1, 2001 and does not believe adoption of SFAS No. 133 will have any
material effect on its consolidated financial position or results of
operations.
26
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(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 $14,977 at December
31, 1999.
(3) CASH AND SHORT-TERM INVESTMENTS (IN THOUSANDS)
Aggregate reserves (in the form of deposits with the Federal Reserve Bank and
vault cash) of $3,251 and $1,209 were maintained to satisfy federal regulatory
requirements at December 31, 1999 and 1998, respectively.
Short-term investments are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
--------- ---------
<S> <C> <C>
Repurchase agreements................................................... $ - $ 12,000
Money market funds...................................................... 4,275 7,560
Federal Home Loan Bank of Boston overnight deposits..................... 3,850 -
Federal funds........................................................... 411 2,038
Other deposits.......................................................... 899 1,062
--------- ---------
$ 9,435 $ 22,660
========= =========
</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.
27
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(4) INVESTMENT SECURITIES (IN THOUSANDS)
Securities available for sale and held to maturity are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
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...................... $ 41,026 $ - $ 131 $ 40,895
Corporate obligations....................................... 11,409 - 205 11,204
Collateralized mortgage obligations......................... 48,729 - 739 47,990
---------- --------- -------- ---------
Total debt securities..................................... 101,164 - 1,075 100,089
Marketable equity securities.................................. 14,878 13,643 335 28,186
---------- --------- -------- ---------
Total securities available for sale....................... $ 116,042 $ 13,643 $ 1,410 $ 128,275
========== ========= ======== ==========
Securities held to maturity:
Corporate obligations......................................... $ 101,795 $ - $ 941 $ 100,854
Mortgage-backed securities.................................... 1,639 24 66 1,597
---------- --------- -------- ---------
Total securities held to maturity......................... $ 103,434 $ 24 $ 1,007 $ 102,451
========== ========= ======== ==========
</TABLE>
<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>
28
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Restricted equity securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
--------- ---------
<S> <C> <C>
Federal Home Loan Bank of Boston stock..................................... $ 5,905 $ 4,921
Massachusetts Savings Bank Life
Insurance Company stock.................................................. 253 253
Other stock................................................................ 121 -
--------- ---------
$ 6,279 $ 5,174
========= =========
</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 $362, $260 and $212 for the years ended December 31, 1999, 1998 and
1997, respectively.
The maturities of the investments in debt securities at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
------------------
AMORTIZED ESTIMATED
MATURITY COST FAIR VALUE
- -------- ---- ----------
<S> <C> <C> <C>
Within 1 year........................................................... $ 42,537 $ 42,412
After 1 year through 5 years............................................ 57,832 56,983
After 5 years through 10 years.......................................... -- --
Over 10 years........................................................... 795 694
---------- ----------
$ 101,164 $ 100,089
========== ==========
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
----------------
AMORTIZED ESTIMATED
MATURITY COST FAIR VALUE
- -------- ---- ----------
<S> <C> <C> <C>
Within 1 year........................................................... $ 54,896 $ 54,648
After 1 year through 5 years............................................ 44,503 43,845
After 5 years through 10 years.......................................... 3,085 3,068
Over 10 years........................................................... 950 890
---------- ----------
$ 103,434 $ 102,451
========== ==========
</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. Collateralized mortgage
obligations are included above based on when the final principal payment is
expected to be received.
Sales and a valuation write-down of investment securities, all of which were
marketable equity securities, are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Proceeds from sales................................................. $ 8,234 $ 3,687 $ 752
Gross gains from sales.............................................. 7,465 2,843 74
Valuation write-down................................................ 28 -- --
</TABLE>
29
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(5) LOANS (IN THOUSANDS)
A summary of loans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
------------ ------------
<S> <C> <C>
Mortgage loans:
One-to-four family ................................................... $ 74,889 $ 64,467
Multi-family.......................................................... 297,270 262,678
Commercial real estate................................................ 221,330 197,593
Construction and development.......................................... 24,719 17,255
Home equity........................................................... 5,800 5,505
Second................................................................ 16,328 13,944
------------ ------------
Total mortgage loans.............................................. 640,336 561,442
Commercial loans........................................................ 30,514 13,051
Consumer loans.......................................................... 2,012 1,775
------------ ------------
Total gross loans................................................. 672,862 576,268
Unadvanced funds on loans............................................... (35,746) (26,096)
Deferred loan origination fees.......................................... (1,550) (1,604)
Unearned discounts...................................................... (10) (10)
------------- ------------
Loans, excluding money market loan participations................. 635,556 548,558
Money market loan participations........................................ 15,400 44,300
------------ ------------
$ 650,956 $ 592,858
============ ============
</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,
------------
1999 1998
--------- ---------
<S> <C> <C>
One-to-four family mortgage loans....................................... $ -- $ 35
Multi-family mortgage loans............................................. 109 110
Commercial real estate mortgage loans................................... -- 1,255
--------- ---------
$ 109 $ 1,400
========= =========
</TABLE>
The average recorded investment in impaired loans for the years ended December
31, 1999, 1998 and 1997 amounted to $755, $1,550 and $4,539, respectively. None
of the impaired loans at December 31, 1999 and 1998 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,
1999, 1998 and 1997 had been made in accordance with original loan agreements,
interest income of $109, $188 and $281 would have been recognized on the loans
in 1999, 1998 and 1997 compared to interest income actually recognized of $340,
$318 and $183, respectively.
Non-accrual loans amounted to $ 0 and $332 at December 31, 1999 and 1998,
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 had been made in accordance with original loan agreements, interest income
of $80 would have been recognized on the loans in 1997 compared to interest
income actually recognized of $6.
There were no restructured loans at December 31, 1999 and 1998. At December 31,
1997, restructured loans amounted to $2,287, $1,137 of which were included in
impaired loans at that date. Restructured loans represent performing 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 and 1997 had been made in accordance with
original loan agreements, interest income of $82 and $108 would have been
recognized on the loans in 1998
30
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
and 1997 compared to interest income actually recognized of $327 and $46,
respectively.
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 $13,917 and $12,227 at
December 31, 1999 and 1998, 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,
-----------------------
1999 1998
------------ -----------
<S> <C> <C>
Balance at beginning of year............................................ $ 6,681 $ 5,969
New loans granted during the year....................................... 17 1,169
Repayments.............................................................. (326) (457)
------- --------
Balance at end of year.................................................. $ 6,372 $ 6,681
======= ========
</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,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year............................................ $ 13,094 $ 12,463 $ 12,326
Provision for loan losses............................................... 450 300 --
Charge-offs............................................................. -- (1) (6)
Recoveries.............................................................. 330 332 143
--------- --------- ---------
Balance at end of year.................................................. $ 13,874 $ 13,094 $ 12,463
========= ========= =========
</TABLE>
(7) BANK PREMISES AND EQUIPMENT (IN THOUSANDS)
Bank premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
--------- ---------
<S> <C> <C>
Land $ 62 $ 62
Office building and improvements........................................ 2,156 1,906
Furniture, fixtures and equipment....................................... 2,031 1,410
--------- --------
4,249 3,378
Accumulated depreciation and amortization............................... 2,714 2,194
--------- --------
$ 1,535 $ 1,184
========= ========
</TABLE>
(8) OTHER REAL ESTATE OWNED (IN THOUSANDS)
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
The composition of other real estate owned as of the dates indicated is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
--------- ---------
<S> <C> <C>
Commercial real estate................................................. $ 633 $ 1,946
Residential............................................................ 160 180
--------- ---------
793 2,126
Valuation allowance.................................................... 86 186
--------- ---------
$ 707 $ 1,940
========= =========
</TABLE>
An analysis of the valuation allowance for the years indicated follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year............................................ $ 186 $ 186 $ 221
Reduction in valuation allowance, net................................... (100) -- --
Write-downs............................................................. -- -- (35)
------- ------ -------
Balance at end of year.................................................. $ 86 $ 186 $ 186
======= ====== =======
</TABLE>
Net other real estate owned income for the years indicated is comprised of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Rental income........................................................... $ 276 $ 383 $ 361
Operating and foreclosure expenses...................................... (130) (154) (135)
Gains from sales........................................................ 465 22 12
Reduction in valuation allowance, net................................... 100 -- --
------- ------ -------
$ 711 $ 251 $ 238
======= ====== =======
</TABLE>
31
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(9) DEPOSITS (DOLLARS IN THOUSANDS)
A summary of deposits follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
<S> <C> <C> <C> <C>
Demand checking accounts................................... $ 12,599 0.00% $ 12,355 0.00%
NOW accounts............................................... 46,970 1.25 42,950 1.50
Savings accounts........................................... 11,945 2.25 12,838 2.50
Money market savings accounts.............................. 198,863 3.92 173,173 3.89
--------- ---------
Total transaction deposit accounts.................... 270,377 3.20 241,316 3.19
--------- ---------
Certificate of deposit accounts maturing:
Within six months....................................... 125,641 5.01 123,547 5.13
After six months but within 1 year...................... 58,087 5.15 71,081 5.37
After 1 year but within 2 years......................... 38,363 5.46 31,737 6.03
After 2 years but within 3 years........................ 12,330 5.73 12,197 5.77
After 3 years........................................... 7,338 5.70 9,492 5.97
--------- ---------
Total certificate of deposit accounts................. 241,759 5.17 248,054 5.38
--------- ---------
$ 512,136 4.13% $ 489,370 4.30%
========== ==========
</TABLE>
Certificate of deposit accounts issued in amounts of $100 or more totaled
$49,530 and $47,798 at December 31, 1999 and 1998, respectively.
Interest expense on deposit balances is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
NOW accounts............................................................ $ 542 $ 617 $ 645
Savings accounts........................................................ 289 356 377
Money market savings accounts........................................... 7,434 6,349 6,109
Certificate of deposit accounts......................................... 12,443 13,877 14,569
--------- --------- ---------
$ 20,708 $ 21,199 $ 21,700
========= ========= =========
</TABLE>
(10) BORROWED FUNDS (DOLLARS IN THOUSANDS)
Borrowed funds are comprised of the following advances from the FHLB:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
<S> <C> <C> <C> <C>
Within 1 year.............................................. $ 9,400 6.24% $ 11,550 6.79%
Over 1 year to 2 years..................................... 9,350 6.66 9,400 6.24
Over 2 years to 3 years.................................... 11,300 6.54 9,350 6.66
Over 3 years to 4 years.................................... 30,750 5.29 15,300 6.32
Over 4 years to 5 years.................................... 32,000 5.91 30,750 5.29
Over 5 years ............................................. 16,000 6.03 18,000 6.06
--------- ---------
$ 108,800 5.91% $ 94,350 6.02%
=========== =========
</TABLE>
32
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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,
-------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.............................................................. $ 11,698 $ 10,450 $ 7,474
State................................................................ 683 863 155
--------- --------- ---------
12,381 11,313 7,629
--------- --------- ---------
Deferred:
Federal.............................................................. (814) (404) (384)
State................................................................ (205) (78) 82
---------- ---------- ---------
(1,019) (482) (302)
---------- ---------- ---------
$ 11,362 $ 10,831 $ 7,327
========= ========= =========
</TABLE>
Total income tax expense differed from the amounts computed by applying the
statutory U.S. federal income tax rate (between 35% and 34% for the years
presented) to income before tax expense as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected income tax expense at
statutory federal tax rate....................................... $ 11,254 $ 10,494 $ 7,322
State taxes, net of federal income tax benefit..................... 311 473 155
Dividend income received deduction................................. (217) (173) (173)
Other, net......................................................... 14 37 23
--------- --------- --------
$ 11,362 $ 10,831 $ 7,327
========= ========= ========
Effective income tax rates......................................... 35.3% 36.1% 34.8%
========= ========= ========
</TABLE>
33
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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,
------------
1999 1998
----------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses............................................ $ 5,718 $ 5,423
Pension and postretirement benefits.................................. 1,718 1,510
Recognition and retention plan....................................... 476 --
Depreciation......................................................... 119 38
Other................................................................ 48 154
-------- --------
Total gross deferred tax assets.................................... 8,079 7,125
-------- --------
Deferred tax liabilities:
Unrealized gain on securities available for sale..................... 4,475 8,787
Post-1987 bad debt reserves.......................................... 76 114
Savings Bank Life Insurance Company stock............................ 108 108
Other................................................................ 194 161
-------- --------
Total gross deferred tax liabilities............................... 4,853 9,170
-------- --------
Net deferred tax (asset) liability................................. $ (3,226) $ 2,045
========== =========
</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 nondividend
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.
34
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(12) EMPLOYEE BENEFITS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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
---------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation:
Obligation at beginning of period ........... $ 4,964 $ 4,706 $ 530 $ 409
Service cost ................................ 259 247 43 31
Interest cost ............................... 335 341 36 31
Actuarial (gain) loss ....................... (570) (139) (36) 71
Benefit payment ............................. (111) (191) (13) (12)
------- ------- ------- -------
Obligation at end of period ............... $ 4,877 $ 4,964 $ 560 $ 530
======= ======= ======= =======
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning
of period .................................. $ 5,776 $ 5,523 $ -- $ --
Actual return on plan assets ................ 1,140 444 -- --
Benefit payments ............................ (111) (191) -- --
------- ------- ------- -------
Fair value of plan assets at end of period $ 6,805 $ 5,776 $ -- $ --
======= ======= ======= =======
Funded status:
Funded status at end of period .............. $ 1,928 $ 812 $ (560) $ (530)
Unrecognized (gain) loss .................... (3,263) (2,107) (32) 2
Unrecognized transition asset ............... (51) (55) 277 296
------- ------- ------- -------
Net amount recognized as a liability in the
Company's balance sheet as of October 31 .. $(1,386) $(1,350) $ (315) $ (232)
======= ======= ======= =======
</TABLE>
The defined benefit pension plan assets are invested primarily in U.S.
Government and Agency obligations, a group annuity contract 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
------------------------------------ -------------------------------
1999 1998 1997 1999 1998 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost ................. $ 259 $ 247 $ 247 $ 43 $ 31 $ 29
Interest cost ................ 335 341 325 36 31 26
Expected return on plan assets (462) (442) (387) -- -- --
Transition obligation ........ (3) (3) (3) 19 17 13
Actuarial gain ............... (92) (90) (67) -- -- --
----- ----- ----- ----- ----- -----
Net periodic benefit costs $ 37 $ 53 $ 115 $ 98 $ 79 $ 68
===== ===== ===== ===== ===== =====
</TABLE>
The pension and postretirement benefits expense for the years ended December 31,
1999, 1998 and 1997 amounted to $129, $130 and $150, respectively.
35
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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
-------------------------- --------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rate ................... 6.75% 7.25% 7.50% 6.75% 6.75% 7.50%
Rate of increase in compensation 5.50 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 2003 and
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.................. $ 18 $ (19)
Effect on the accumulated postretirement benefit
obligation.................................................... 102 (106)
</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 $419, $425 and $503 for the years ended December 31, 1999,
1998 and 1997, respectively. Aggregate benefits payable included in accrued
expenses and other liabilities at December 31, 1999 and 1998 amounted to $2,392
and $1,973, 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,
completion of 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, 1999, the ESOP held 407,218 unallocated shares at an aggregate
cost of $5,058; the market value of such shares at that date was $3,968. For the
years ended December 31, 1999 and 1998, $377 and $291 were charged to
compensation and employee benefits expense based on the commitment to release
34,239 shares in 1999 and 21,143 shares in 1998 to eligible employees.
36
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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.
RECOGNITION AND RETENTION PLAN
On April 15, 1999, the stockholders approved the Company's 1999 Recognition and
Retention Plan (the "RRP"). Under the RRP, 546,986 shares of the Company's
common stock have been reserved for issuance as restricted stock awards to
officers, employees and non-employee directors in recognition of prior service
and as an incentive for such individuals to remain with the Company. Shares
issued upon vesting may be either authorized but unissued shares or reacquired
shares held by the Company as treasury shares. Through December 31, 1999, the
Company acquired 228,000 shares of stock that relates to the RRP; such shares
are included in treasury stock. Any shares not issued because vesting
requirements are not met will again be available for issuance under the RRP. On
April 19, 1999, 546,500 shares were awarded to officers and non-employee
directors of the Company. The shares vest over varying time periods ranging from
six months up to eight years. In the event a recipient ceases to maintain
continuous service with the Company by reason of normal retirement, death or
disability, or following a change in control, RRP shares still subject to
restrictions will vest and be free of such restrictions. In 1999, 227,125 shares
vested and 201,884 are scheduled to vest in 2000. Expense is recognized for
shares awarded over the vesting period at the fair market value of the shares on
the date they were awarded, or $10.8125 per share. RRP expense amounted to
$3,593 in 1999 and is expected to amount to $1,254 in 2000 and less than $175
per year from 2001 through 2007.
STOCK OPTION PLAN
On April 15, 1999, the stockholders approved the Company's 1999 Stock Option
Plan (the "Stock Option Plan"). Under the Stock Option Plan, 1,367,465 shares of
the Company's common stock have been reserved for issuance to officers,
employees and non-employee directors of the Company. Shares issued upon the
exercise of a stock option may be either authorized but unissued shares or
reacquired shares held by the Company as treasury shares. Any shares subject to
an award which expire or are terminated unexercised will again be available for
issuance under the Stock Option Plan. On April 19, 1999, 1,265,500 options were
awarded to officers and non-employee directors of the Company at an exercise
price of $10.8125 per share, the fair market value of the common stock of the
Company on that date. Options are exercisable within ten years from the date
of the Award. Of the total options awarded, 410,460 options are
incentive stock options and 855,040 options are non-qualified stock options.
Options awarded vest over periods ranging from less than six months through five
years. As of December 31, 1999, 500,000 have vested and no options have been
exercised or forfeited. If an individual to whom a stock option was granted
ceases to maintain continuous service by reason of normal retirement, death or
disability, or following a change in control, all options and rights granted and
not fully exercisable become exercisable in full upon the happening of such
event and shall remain exercisable for a one year period.
In accordance with SFAS No. 123, the Company used the Black-Scholes option
pricing model with the following weighted average assumptions to value the
options granted: a dividend yield of 2.22%, expected volatility of 25.55%, a
risk-free interest rate of 5.22% and expected option lives of 6.38 years.
On a pro forma basis, had compensation expense for the Company's stock-based
compensation plan been determined based on the fair value at the grant date for
awards made under the plan, consistent with SFAS No. 123, the Company's net
income and earnings per share for the year ended December 31, 1999 would have
been reduced as follows:
<TABLE>
<S> <C>
Net income:
As reported.................................................. $ 20,791
Pro forma.................................................... 18,984
Basic and diluted earnings per share:
As reported.................................................. $ 0.74
Pro forma.................................................... 0.68
</TABLE>
37
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(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,
------------
1999 1998
--------- ---------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans:
One-to-four family mortgage............................................ $ 3,987 $ 2,877
Multi-family mortgage.................................................. 11,964 10,200
Commercial real estate mortgage........................................ 12,856 29,404
Construction and development mortgage.................................. -- 2,185
Commercial............................................................. 890 763
Unadvanced portion of loans............................................... 35,746 26,096
Unused lines of credit:
Equity................................................................. 9,932 7,925
Other.................................................................. 1,313 1,335
</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.
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>
2000..................................................... $ 545
2001..................................................... 539
2002..................................................... 596
2003..................................................... 362
2004..................................................... 362
</TABLE>
The leases contain escalation clauses for real estate taxes and other
expenditures. Total rental expense was $403, $307 and $305 for the years ended
December 31, 1999, 1998 and 1997, respectively.
38
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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 $29 and $13
for the years ended December 31, 1999 and 1998, respectively.
LEGAL PROCEEDINGS
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consulting with legal counsel,
the consolidated financial position and results of operations of the 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, 1999, 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 31,1999, the Company has acquired 1,263,700 shares at an
aggregate cost of $14,055 under this approved regulatory plan. Additionally, in
connection with the Company's RRP, 228,000 were purchased as of December 31,
1999 at an aggregate cost of $2,279.
(15) EARNINGS PER SHARE RECONCILIATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
AMOUNTS)
The following table is the reconciliation of basic and diluted earnings per
share as required under SFAS No. 128 for the year ended December 31, 1999. In
1998, there were no options outstanding and, accordingly, basic and diluted
earnings per share were identical.
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
----------- ------------- -------
<S> <C> <C> <C>
Net income $ 20,791
=========
Basic earnings per share:
Income available to common stockholders $ 20,791 28,016,150 $ 0.74
Effect of dilutive securities:
Options -- -- --
--------- ---------- -------
Diluted earnings per share:
Income available to common stockholders $ 20,791 28,016,150 $ 0.74
========= ========== =======
</TABLE>
39
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Options to purchase 1,265,500 shares of common stock outstanding at December 31,
1999 and 319,375 shares not yet vested under the Recognition and Retention Plan
as of that same date were not included in the computation of common shares
outstanding for purposes of computing diluted earnings per share because the
effect would have been anti-dilutive.
(16) 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, 1999 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tier I Capital (to average assets):
The Company .......................... $274,231 30.71% $ 35,718 4.00% N/A --
The Bank ............................. 205,237 24.57 33,415 4.00 $ 44,648 5.00%
Tier I Capital (to risk-weighted assets):
The Company .......................... 274,231 35.08 31,269 4.00 N/A --
The Bank ............................. 205,237 28.22 29,090 4.00 43,635 6.00
Total Capital (to risk-weighted assets):
The Company .......................... 290,042 37.10 62,537 8.00 N/A --
The Bank ............................. 220,177 30.28 58,179 8.00 72,725 10.00
</TABLE>
<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>
40
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(17) 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, 1999 DECEMBER 31, 1998
----------------- -----------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks...................... $ 8,203 $ 8,203 $ 6,657 $ 6,657
Short-term investments....................... 9,435 9,435 22,660 22,660
Securities................................... 237,988 237,005 260,093 260,746
Loans, net................................... 637,082 631,880 579,764 583,658
Accrued interest receivable.................. 5,811 5,811 6,457 6,457
Swap agreement............................... -- 217 -- --
Financial liabilities:
Demand, NOW, savings and money
market savings deposit accounts............ 270,377 270,377 241,316 241,316
Certificate of deposit accounts.............. 241,759 241,470 248,054 248,888
Borrowed funds............................... 108,800 104,250 94,350 95,731
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.
41
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
DEPOSIT LIABILITIES
In accordance with SFAS No. 107, the fair values of deposit liabilities with no
stated maturity (demand, NOW, savings and money market savings accounts) are
equal to the carrying amounts payable on demand. The fair value of time deposits
represents contractual cash flows discounted using interest rates currently
offered on deposits with similar characteristics and remaining maturities. The
fair value estimates for deposits do not include the benefit that results from
the low-cost funding provided by the deposit liabilities compared to the cost of
alternative forms of funding ("deposit based intangibles").
BORROWED FUNDS
The fair value of borrowings from the FHLB represent contractual repayments
discounted using interest rates currently available for borrowings with similar
characteristics and remaining maturities.
OTHER FINANCIAL ASSETS AND LIABILITIES
Cash and due from banks, short-term investments and accrued interest receivable
have fair values which approximate the respective carrying values because the
instruments are payable on demand or have short-term maturities and present
relatively low credit risk and interest rate risk.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the course of originating loans and extending credit, the 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.
42
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(18) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
Condensed parent company financial statements as of December 31 1999 and 1998,
the year ended December 31, 1999 and the period from March 24, 1998 (the date
the Company commenced operations) through December 31, 1998 follow.
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- ---------------
ASSETS
<S> <C> <C>
Cash and due from banks ..................... $ 182 $ 33
Short-term investments ...................... 25 1,500
Money market loan participations ............ -- 2,000
Equity securities available for sale ........ 39 48
Loan to Bank ESOP ........................... 5,127 4,913
Investment in subsidiaries, at equity ....... 270,149 274,726
Other investment ............................ 3,022 --
Bank premises and equipment, net ............ 280 --
Accrued interest receivable ................. 1 7
Deferred tax asset .......................... 1 --
Other assets ................................ 57 --
-------- --------
Total assets ........................... $278,883 $283,227
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities ...... $ 114 $ 52
Deferred income tax liability ............... -- 3
-------- --------
Total liabilities ...................... 114 55
Total stockholders' equity .................. 278,769 283,172
-------- --------
Total liabilities and stockholders' equity $278,883 $ 283,227
======== ========
</TABLE>
The Company's consolidated stockholders' equity is $3,969 and $ 4,950,
respectively, less than the amounts presented above because of the elimination
of the effect of unallocated ESOP shares in consolidation.
STATEMENTS OF INCOME
--------------------
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 24,
YEAR ENDED 1998 THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Dividend income from subsidiaries ................................... $ 19,110 $ --
Interest income:
Short-term investments ............................................ 72 248
Money market loan participations .................................. 11 450
Marketable equity securities ...................................... 1 --
Loan to Bank ESOP ................................................. 425 188
Equity interest in earnings of other investment ..................... 21 --
-------- --------
Total income ................................................... 19,640 886
-------- --------
Expenses:
Directors' fees ................................................... 58 39
Internet bank start-up ............................................ 675 --
Other ............................................................. 193 45
-------- --------
Total expenses ................................................. 926 84
-------- --------
Income before income taxes and equity in undistributed net
income of subsidiaries ...................................... 18,714 802
Income tax expense (benefit) ........................................ (88) 338
-------- --------
Income before equity in undistributed net income of subsidiaries 18,802 464
Equity in undistributed net income of subsidiaries .................. 1,989 15,303
-------- --------
Net income ..................................................... $ 20,791 $ 15,767
======== ========
</TABLE>
43
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
PERIOD FROM MARCH
YEAR ENDED 24, 1998 THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 20,791 $ 15,767
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiaries (1,989) (15,303)
Equity interest in earnings of other investment .. (21) --
Depreciation and amortization .................... 10 --
Deferred income taxes ............................ (4) 3
(Increase) decrease in accrued interest receivable 6 (7)
Increase in other assets ......................... (57) --
Increase in accrued expenses and other liabilities 62 61
--------- ---------
Net cash provided from operating activities . 18,798 521
--------- ---------
Cash flows from investing activities:
Investment in subsidiaries ............................. -- (122,597)
ESOP loan to subsidiary bank ........................... (549) (5,248)
Repayment of ESOP loan by subsidiary bank .............. 335 335
Payment from subsidiary bank for shares vested in
recognition and retention plan ...................... 2,459 --
Funding of other investment ............................ (3,001) --
Purchase of bank premises and equipment ................ (290) --
Purchase of securities available for sale .............. -- (42)
--------- ---------
Net cash used for investing activities ...... (1,046) (127,552)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock ............. -- 134,790
Purchase of treasury stock ............................. (15,018) (1,316)
Payment of common stock dividends ...................... (6,060) (2,910)
--------- ---------
Net cash provided from (used for) financing
activities .............................. (21,078) 130,564
--------- ---------
Net (decrease) increase in cash and cash equivalents ..... (3,326) 3,533
Cash and cash equivalents at beginning of period ......... 3,533 --
--------- ---------
Cash and cash equivalents at end of period ............... $ 207 $ 3,533
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes ........... $ -- $ 227
</TABLE>
44
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(19) ESTABLISHMENT OF A NEW INTERNET BANK SUBSIDIARY (DOLLARS IN THOUSANDS)
On August 12, 1999, the Company filed an application with bank
regulators to form a new wholly-owned Massachusetts-chartered stock
savings bank subsidiary which will operate as an "internet bank". The
new bank will be called LighthouseBank.com ("Lighthouse"). The Company
is hopeful that Lighthouse will commence offering products and services
to the public in the second quarter of 2000.
During 1999, the Company incurred expenses of $675 in connection with
the formation and start-up of Lighthouse. The expenses related primarily
to compensation, occupancy and professional fees. Start-up expenses will
continue until regulatory approvals are obtained and Lighthouse is ready
to transact business.
Once regulatory approvals are obtained, the Company intends to provide
Lighthouse with initial capital of $25,000 in exchange for 1,000,000
shares of common stock of Lighthouse. As of the same date of the
capitalization, the Company intends to grant senior officers of
Lighthouse options to purchase in the aggregate ten percent of the
common stock of Lighthouse. The exercise price of each option will be
the same as the per share price paid by the Company. The options will
vest at the rate of 40% at the end of the first anniversary following
the award and 20% on each succeeding anniversary date. Upon a change in
control in the Company or Lighthouse, all options granted would become
fully vested.
45
<PAGE>
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(20) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER
SHARE DATA)
<TABLE>
<CAPTION>
1999 QUARTERS
--------------------------------------------------
FOURTH THIRD SECOND FIRST
------ ----- ------ -----
<S> <C> <C> <C> <C>
Interest income ...................... $ 16,480 $ 16,538 $ 15,983 $ 15,808
Interest expense ..................... 6,880 6,877 6,792 6,613
-------- -------- -------- --------
Net interest income ................ 9,600 9,661 9,191 9,195
Provision for loan losses ............ 150 -- 150 150
-------- -------- -------- --------
Net interest income after provision
for loan losses ................. 9,450 9,661 9,041 9,045
Gains on sales of securities, net .... 1,850 1,989 2,408 1,190
Other real estate owned income ,net .. (49) 651 56 53
Other non-interest income ............ 293 225 238 210
Recognition and retention plan expense (682) (1,637) (1,274) --
Internet bank start-up expense ....... (403) (272) -- --
Other non-interest expense ........... (2,549) (2,467) (2,478) (2,396)
-------- -------- -------- --------
Income before income taxes ......... 7,910 8,150 7,991 8,102
Provision for income taxes ........... 2,744 2,872 2,827 2,919
-------- -------- -------- --------
Net income ......................... $ 5,166 $ 5,278 $ 5,164 $ 5,183
======== ======== ======== ========
Basic and diluted earnings per share . $ 0.19 $ 0.19 $ 0.18 $ 0.18
</TABLE>
<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
</TABLE>
NM - Not meaningful
46
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,203
<INT-BEARING-DEPOSITS> 899
<FED-FUNDS-SOLD> 23,937
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 134,554
<INVESTMENTS-CARRYING> 103,434
<INVESTMENTS-MARKET> 102,451
<LOANS> 650,956
<ALLOWANCE> 13,874
<TOTAL-ASSETS> 907,334
<DEPOSITS> 512,136
<SHORT-TERM> 108,800
<LIABILITIES-OTHER> 11,598
<LONG-TERM> 0
0
0
<COMMON> 296
<OTHER-SE> 274,504
<TOTAL-LIABILITIES-AND-EQUITY> 907,334
<INTEREST-LOAN> 50,134
<INTEREST-INVEST> 14,041
<INTEREST-OTHER> 634
<INTEREST-TOTAL> 64,809
<INTEREST-DEPOSIT> 20,708
<INTEREST-EXPENSE> 27,162
<INTEREST-INCOME-NET> 37,647
<LOAN-LOSSES> 450
<SECURITIES-GAINS> 7,437
<EXPENSE-OTHER> 14,158
<INCOME-PRETAX> 32,153
<INCOME-PRE-EXTRAORDINARY> 20,791
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,791
<EPS-BASIC> 0.74
<EPS-DILUTED> 0.74
<YIELD-ACTUAL> 4.20
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 109
<ALLOWANCE-OPEN> 13,094
<CHARGE-OFFS> 0
<RECOVERIES> 330
<ALLOWANCE-CLOSE> 13,874
<ALLOWANCE-DOMESTIC> 10,874
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,000
</TABLE>
