SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Fiscal Year Ended December 31, 2003 |
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OR |
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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)
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Delaware |
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04-3402944 |
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(State or other jurisdiction of incorporation of organization) |
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(I.R.S. Employer Identification No.) |
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160 Washington Street, Brookline, MA |
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02447-0469 |
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(Address of principal executive offices) |
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(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 ý NO o
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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES ý NO o
The number of shares of common stock held by nonaffiliates of the registrant as of March 10, 2004 was 58,122,129 for an aggregate market value of $892,755,901. This excludes 803,356 shares held by Brookline Bank Employee Stock Ownership Plan and Trust.
At March 8, 2004, the number of shares of common stock, par value $0.01 per share, issued and outstanding were 60,260,784 and 58,925,485, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of the Annual Report to Stockholders for the year ended December 31, 2003 (Part II and Part III)
2. Proxy Statement for the Annual Meeting of Stockholders dated March 15, 2004 (Part I and Part III)
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-K
Index
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that may be identified by the use of such words as “may”, “could”, “should”, “will”, “would”, “believe”, “expect”, “anticipate”, “estimate”, “intend”, “plan”, “assume” or similar expressions. Examples of forward-looking statements include, but are not limited to, estimates with respect to the Company’s financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from those estimates. The following factors, among others, could cause the Company’s actual performance to differ materially from the expectations, forecasts and projections expressed in the forward-looking statements: general and local economic conditions, changes in interest rates, demand for loans, real estate values, deposit flows, regulatory considerations, competition, technological developments, retention and recruitment of qualified personnel, and market acceptance of the Company’s pricing, products and services.
Item 1. Business
General
Brookline Bancorp, Inc. (the “Company”) was organized in November 1997 for the purpose of acquiring all of the capital stock of Brookline Savings Bank (“Brookline” or the “Bank”) upon completion of the reorganization of Brookline from a mutual savings bank into a mutual holding company structure. In January 2003, Brookline Savings Bank changed its name to Brookline Bank. Brookline was established as a savings bank in 1871. Brookline Bancorp, MHC (the “MHC”), a mutual holding company, owned 15,420,350 of the Company’s shares of outstanding common stock through July 9, 2002.
In June 2000, the Company commenced operations of Lighthouse Bank (“Lighthouse”) as New England’s first-chartered internet-only bank. On July 17, 2001, Lighthouse was merged into Brookline.
The Company, the MHC, Brookline and Lighthouse converted from state to federal charters on July 16, 2001. As a result, each of these entities became subject to regulation by the Office of Thrift Supervision (“OTS”).
On July 9, 2002, the Boards of Directors of the MHC, the Company and Brookline completed a Plan of Conversion and Reorganization. As of that date, the 15,420,350 shares owned by the MHC were retired and the Company sold 33,723,750 shares of common stock for $10.00 per share. After taking into consideration related expenses of $4.5 million, net proceeds from the stock offering amounted to $332.7 million. An additional 24,888,478 shares were issued to existing stockholders based on an exchange rate of 2.186964 new shares of common stock for each existing share, resulting in 58,612,228 total new shares outstanding. Cash was paid in lieu of fractional shares.
Upon completion of the Plan of Conversion and Reorganization, (a) Brookline Bancorp, Inc. became a Delaware corporation and the holding company parent of the Bank, (b) the MHC ceased to exist and (c) the net assets of the MHC, $8.5 million, were transferred into Brookline.
Market Area and Credit Risk Concentration
Brookline operates five full-service banking offices in Brookline, an urban/suburban community adjacent to the City of Boston, and full service banking offices in Newton and West Roxbury, communities adjacent to Brookline.
Brookline’s deposits are gathered from the general public primarily in Brookline, Newton, West Roxbury and surrounding communities. Brookline’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.
Brookline’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, Brookline 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 Brookline’s borrowers have more than one multi-family or commercial real estate loan outstanding with Brookline. Moreover, the loans are concentrated in the market area described in the preceding paragraph.
1
In the first quarter of 2003, the Company commenced originating indirect automobile loans. In general, the success of lending in this business segment depends on many factors, the more significant of which include the policies established for loan underwriting, the monitoring of portfolio performance, and the effect of economic conditions on consumers and the automobile industry. For regulatory purposes, the Company’s loan portfolio is not classified as “subprime lending”. Most of the Company’s loans are originated through automobile dealerships in Massachusetts. Ultimately, the Company’s market could be extended to auto dealerships in Rhode Island, Connecticut and New Hampshire.
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.
Repayment of loans made by the Company, 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. Repayment of indirect automobile loans generally is dependent on the financial well-being of the borrowers and their capacity to service their debt levels. Accordingly, the asset quality of the Company’s loan portfolio is greatly affected by the economy in the Company’s market area. During the past few years, interest rates have declined or remained at attractive levels. While these conditions, for the most part, have had a favorable impact on property values and the business of the Company 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, thus causing pressure on the Company’s interest rate margin. During the past year, the Massachusetts economy has come under some pressure resulting in higher unemployment levels. Continuation of that trend could cause increased property vacancies, reduced real estate values, and higher loan delinquencies and charge-offs.
Competition
The Company 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 Company, and all of which are competitors of the Company to varying degrees. The Company’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 Company faces additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies.
Investment Securities
The investment policy of the Company is reviewed and approved by the Board of Directors on an annual basis. The current policy states that investments should generally be of high quality and credit risk should be limited through diversification. Investment decisions are made based on the safety of the investment, expected earnings in relation to investment risk, the liquidity needs of the Company, the interest rate risk profile of the Company, and economic and market trends.
Generally, debt securities must be rated “A” or better by at least one nationally-recognized rating agency at the time of purchase. Debt securities rated “BBB” at the time of purchase are allowed provided the security has a scheduled maturity of no more than two years and the purchase is authorized by the chief executive officer of the Company. The carrying value of all debt securities in the Company’s investment portfolio that are not rated or rated “BBB” or lower are not to exceed 10.0% of stockholders’ equity, excluding unrealized gains on securities available for sale (“core capital”). At December 31, 2003, $4.8 million of debt securities were rated “BBB” or lower, an amount equal to 0.8% of core capital.
Corporate Obligations
With the exception of investment in debt securities issued by the U.S. Treasury or Government agencies, no more than $5.0 million of any debt security should mature beyond one year at the time of purchase, no investment of more than $3.0 million in any debt security can be made without the prior approval of the chief executive officer of the Company and no investment of over $8.0 million can be made without the prior approval of the Executive Committee of the Board of Directors. To maintain diversification in the portfolio, the aggregate carrying value of debt securities issued by one company (excluding short-term investments) must not exceed $10.0 million and the aggregate carrying value of debt securities issued by companies considered to be in the same industry (e.g. finance companies, gas and utility companies, etc.) must not exceed $60.0 million. The latter limit is allowed provided the aggregate value of investments rated less than “AA” does not exceed $40.0 million. At December 31, 2003, the aggregate carrying value of the largest holding of debt securities issued by one
2
company was $3.2 million and the largest amount of debt securities issued by companies within the same industry was $4.3 million.
Mortgage Securities
The Company also invests in mortgage related securities, especially collateralized mortgage obligations (“CMOs”). These securities are considered attractive investments because they (a) generate positive yields with minimal administrative expense, (b) impose minimal credit risk as a result of the guarantees usually provided, (c) can be utilized as collateral for borrowings, (d) generate cash flows useful for liquidity management and (e) are “qualified thrift investments” for purposes of the thrift lender test that the Company is obliged to meet for regulatory purposes.
Mortgage related securities are created by the pooling of mortgages and the issuance of a security with an interest rate that is less than the average interest rate on the underlying mortgages. Mortgage related securities purchased by the Company generally are comprised of a pool of single-family mortgages. The issuers of such securities are generally U.S. government agencies or government sponsored enterprises such as Fannie Mae, Freddie Mac and Ginnie Mae who pool and resell participation interests in the form of securities to investors and guarantee the payment of principal and interest to the investors. Occasionally, the Company purchases mortgage related securities that are not issued by U.S. government agencies or government sponsored enterprises. Such purchases are usually made for community reinvestment (“CRA”) purposes. Mortgage related securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements.
Investments in mortgage related securities generally do not entail significant credit risk. Such investments, however, are susceptible to significant interest rate and cash flow risks when actual cash flows from the investments differ from cash flows estimated at the time of purchase. Additionally, the market value of such securities can be affected adversely by market changes in interest rates. Prepayments that are faster than anticipated may shorten the life of a security and result in the accelerated expensing of any premiums paid, thereby reducing the net yield earned on the security. Although prepayments of underlying mortgages depend on many factors, the difference between the interest rates on the underlying mortgages and prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of declining interest rates, refinancing generally increases and accelerates the prepayment of underlying mortgages and the related security. Such an occurrence can also create reinvestment risk because of the unavailability of other investments with a comparable rate of return in relation to the nature and maturity of the alternative investment. Conversely, in a rising interest rate environment, prepayments may decline, thereby extending the estimated life of the security and depriving the Company of the ability to reinvest cash flows at the higher market rates of interest.
CMOs are a type of debt security issued by a special purpose entity that aggregates pools of mortgages and mortgage related securities and creates different classes of CMO securities with varying maturities and amortization schedules as well as residual interest with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into “tranches”, or classes, whereby tranches have descending priorities with respect to the distribution of principal and interest repayment of the underlying mortgages and mortgage related securities, as opposed to pass through mortgage-backed securities where cash flows are distributed pro rata to all security holders. In contrast to mortgage-backed securities from which cash flow is received pro rata by all security holders (and hence, prepayment risk is shared), the cash flow from the mortgages or mortgage related securities underlying CMOs is paid in accordance with predetermined priority to investors holding various tranches of such securities. A particular tranche of a CMO may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches. Accordingly, CMOs attempt to moderate risks associated with conventional mortgage related securities resulting from unexpected prepayment activity. Investment in CMOs involves a risk that actual prepayments will differ from those estimated in the pricing of a tranche of the security, which may result in adjustments to the net yield of the security. Additionally, the market value of such a security may be affected adversely by changes in market rates of interest.
An analysis is performed of the characteristics of a mortgage related security under consideration prior to its purchase. At a minimum, the analysis shows the expected change in the value of the security that would result from an immediate upward or downward parallel shift in the yield curve. Additionally, the analysis often includes a wider range of scenarios involving changes in interest rate volatility, changes in credit spreads and changes in prepayment speeds. The purchase of any mortgage related security with high price sensitivity (price decline of more than 10.0% under an adverse parallel change in interest rates) must be approved by the chief executive officer of the Company.
Generally, the Company has been purchasing the first tranche of CMOs so as to keep the expected maturities of its investments relatively short and to reduce the exposure to prepayment and reinvestment risks. The first tranche of CMOs are commonly classified as PAC-1-1 securities. No purchase of any mortgage related security in excess of $5.0 million or involving payment of a premium of 2.0% or more or having an expected average life of more than three years can be made without the approval of the chief executive officer of the Company. Purchases of all mortgage related securities not classified as PAC-1-1 securities or issued by other than U.S. government agencies or government sponsored enterprises also
3
require approval of the chief executive officer. It is the Company’s policy that aggregate unamortized premiums on all mortgage related securities in the Company’s portfolio must not exceed $5.0 million. At December 31, 2003, aggregate unamortized premiums on all mortgage related securities in the portfolio amounted to $2.5 million.
In the second half of 2002 and the first quarter of 2003, the Company invested a substantial part of the proceeds from the 2002 stock offering in CMO and pass-through mortgage-backed securities (collectively “mortgage securities”) with expected maturities in the two to three year range for CMOs and in the four to five year range for mortgage-backed securities. Because of the declining interest rate environment, the securities were purchased at a premium.
The Company’s investment in mortgage securities increased from $107.4 million at June 30, 2002 to $157.9 million at September 30, 2002, $281.7 million at December 31, 2002 and $315.0 million at March 31, 2003. From that date, the mortgage securities portfolio declined to $137.0 million at December 31, 2003.
Unprecedented prepayment of loans underlying the mortgage securities subsequent to their purchase caused the rapid decrease in the portfolio and shortened the estimated life of the securities significantly. This necessitated the accelerated expensing of part of the premiums paid to purchase the securities. Total accelerated premium amortization was $2.4 million in 2003. In the past few months, the level of prepayments has subsided and, therefore, accelerated amortization is not expected to be significant in 2004. If interest rates were to remain at current levels or decline further, it could cause another wave of loan prepayments resulting in accelerated amortization of the remaining balance of premiums paid.
Municipal Obligations
In 2003, the Company purchased Massachusetts municipal general obligation bonds, the total of which at December 31, 2003 was $6.3 million. The obligations are rated “AAA” and mature within one and a half years. The bonds constitute a pledge by the issuing municipalities of their full faith and credit. Payment is not limited to a particular fund or revenue source.
Preferred Stock and Marketable Equity Securities
At December 31, 2003, the Company held $5.0 million of auction rate preferred stocks and $6.3 million of marketable equity securities, including net unrealized gains of $3.0 million. Auction rate preferred stocks are securities issued by national companies that generally are called after 49 days from the date of issuance or are offered in a new auction. Most of the other marketable equity securities include stocks of national, regional money center and community banks and utility companies. The Company’s policy limits the aggregate cost of marketable equity securities issued by one company to no more than $10.0 million without prior approval of the Executive Committee of the Board of Directors. The aggregate cost of marketable equity securities issued by companies considered to be in the same industry must not exceed $30.0 million and the aggregate cost of the entire marketable equity securities portfolio must not exceed $50.0 million. At December 31, 2003, the aggregate cost of such securities amounted to $3.3 million. The Company purchases marketable equity securities as long-term investments that can provide the opportunity for capital appreciation and dividend income that is taxed on a more favorable basis than operating income. There can be no assurance that investment in marketable equity securities will achieve appreciation in value and, therefore, such investments involve higher risk.
4
The following table sets forth the composition of the Company’s debt and equity securities portfolios at the dates indicated:
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At December 31, |
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2003 |
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2002 |
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2001 |
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Amount |
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Percent |
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Amount |
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Percent |
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Amount |
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Percent |
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(Dollars in thousands) |
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Debt securities: |
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U.S. Government and Agency obligations |
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$ |
123,324 |
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41.01 |
% |
$ |
45,195 |
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12.04 |
% |
$ |
14,208 |
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7.79 |
% |
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Municipal obligations |
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6,305 |
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2.10 |
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— |
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— |
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— |
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— |
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Corporate obligations |
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10,250 |
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3.41 |
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23,883 |
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6.37 |
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57,654 |
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31.63 |
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Other obligations |
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1,250 |
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0.42 |
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1,250 |
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0.33 |
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1,250 |
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0.69 |
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Collateralized mortgage obligations issued by U.S. Government agencies |
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111,061 |
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36.93 |
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267,846 |
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71.36 |
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79,701 |
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43.73 |
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Mortgage-backed securities issued by U.S. Government agencies |
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25,776 |
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8.57 |
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13,898 |
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3.70 |
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2,983 |
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1.64 |
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Total debt securities |
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277,966 |
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92.44 |
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352,072 |
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93.80 |
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155,796 |
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85.48 |
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Auction rate preferred stock |
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5,000 |
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1.66 |
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5,000 |
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1.33 |
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— |
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— |
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Other marketable equity securities |
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6,329 |
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2.11 |
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8,838 |
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2.36 |
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17,187 |
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9.43 |
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Restricted equity securities |
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11,401 |
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3.79 |
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9,423 |
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2.51 |
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9,281 |
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5.09 |
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Total investment securities |
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$ |
300,696 |
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100.00 |
% |
$ |
375,333 |
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100.00 |
% |
$ |
182,264 |
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100.00 |
% |
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Debt and equity securities available for sale |
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$ |
287,952 |
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95.76 |
% |
$ |
361,049 |
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96.19 |
% |
$ |
163,425 |
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89.66 |
% |
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Debt securities held to maturity |
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1,343 |
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0.45 |
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4,861 |
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1.30 |
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9,558 |
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5.25 |
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Restricted equity securities |
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11,401 |
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3.79 |
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9,423 |
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2.51 |
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9,281 |
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5.09 |
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Total investment securities |
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$ |
300,696 |
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100.00 |
% |
$ |
375,333 |
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100.00 |
% |
$ |
182,264 |
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100.00 |
% |
5
The following table sets forth certain information regarding the amortized cost and market value of the Company’s investment securities at the dates indicated:
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At December 31, |
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2003 |
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2002 |
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2001 |
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Amortized |
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Market |
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Amortized |
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Market |
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Amortized |
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Market |
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(Dollars in thousands) |
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Securities available for sale: |
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Debt securities: |
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|
|
|
|
|
|
|
|
|
|
||||||
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U.S. Government and Agency obligations |
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$ |
122,522 |
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$ |
123,324 |
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$ |
43,698 |
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$ |
45,195 |
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$ |
14,093 |
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$ |
14,208 |
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|
Municipal obligations |
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6,309 |
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6,305 |
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— |
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— |
|
— |
|
— |
|
||||||
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Corporate obligations |
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9,937 |
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10,250 |
|
20,579 |
|
20,882 |
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48,573 |
|
50,140 |
|
||||||
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Other obligations |
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500 |
|
500 |
|
500 |
|
500 |
|
500 |
|
500 |
|
||||||
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Collateralized mortgage obligations issued by U.S. Government agencies |
|
111,269 |
|
111,061 |
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266,874 |
|
267,846 |
|
78,536 |
|
79,701 |
|
||||||
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Mortgage-backed securities issued by U.S. Government agencies |
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25,167 |
|
25,183 |
|
12,707 |
|
12,788 |
|
1,662 |
|
1,689 |
|
||||||
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Total debt securities |
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275,704 |
|
276,623 |
|
344,358 |
|
347,211 |
|
143,364 |
|
146,238 |
|
||||||
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Auction rate preferred stock |
|
5,000 |
|
5,000 |
|
5,000 |
|
5,000 |
|
— |
|
— |
|
||||||
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Marketable equity securities |
|
3,305 |
|
6,329 |
|
5,087 |
|
8,838 |
|
9,502 |
|
17,187 |
|
||||||
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Total securities available for sale |
|
284,009 |
|
287,952 |
|
354,445 |
|
361,049 |
|
152,866 |
|
163,425 |
|
||||||
|
Net unrealized gains on securities available for sale |
|
3,943 |
|
— |
|
6,604 |
|
— |
|
10,559 |
|
— |
|
||||||
|
Total securities available for sale, net |
|
$ |
287,952 |
|
$ |
287,952 |
|
$ |
361,049 |
|
$ |
361,049 |
|
$ |
163,425 |
|
$ |
163,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
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Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Corporate obligations. |
|
$ |
— |
|
$ |
— |
|
$ |
3,001 |
|
$ |
3,022 |
|
$ |
7,514 |
|
$ |
7,695 |
|
|
Other obligations |
|
750 |
|
750 |
|
750 |
|
750 |
|
750 |
|
750 |
|
||||||
|
Mortgage-backed securities issued by U.S. Government agencies |
|
593 |
|
631 |
|
1,110 |
|
1,172 |
|
1,294 |
|
1,321 |
|
||||||
|
Total securities held to maturity |
|
$ |
1,343 |
|
$ |
1,381 |
|
$ |
4,861 |
|
$ |
4,944 |
|
$ |
9,558 |
|
$ |
9,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Restricted equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Federal Home Loan Bank of Boston stock |
|
$ |
11,026 |
|
|
|
$ |
9,049 |
|
|
|
$ |
8,907 |
|
|
|
|||
|
Massachusetts Savings Bank Life Insurance Company stock |
|
253 |
|
|
|
253 |
|
|
|
253 |
|
|
|
||||||
|
Other stock |
|
122 |
|
|
|
121 |
|
|
|
121 |
|
|
|
||||||
|
Total restricted equity securities |
|
$ |
11,401 |
|
|
|
$ |
9,423 |
|
|
|
$ |
9,281 |
|
|
|
|||
6
The table below sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Company’s securities portfolio at the date indicated.
|
|
|
At December 31, 2003 |
|
|||||||||||||||||||||||
|
|
|
One year or less |
|
After one
year |
|
After five
years |
|
After ten years |
|
Total |
|
|||||||||||||||
|
|
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
|||||
|
|
|
(Dollars in thousands) |
|
|||||||||||||||||||||||
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
U.S. Government and agency obligations |
|
$ |
67,157 |
|
2.94 |
% |
$ |
56,167 |
|
1.80 |
% |
— |
|
— |
|
— |
|
— |
|
$ |
123,324 |
|
2.42 |
% |
||
|
Municipal obligations (1) |
|
3,572 |
|
1.57 |
|
2,733 |
|
1.72 |
|
— |
|
— |
|
— |
|
— |
|
6,305 |
|
1.64 |
|
|||||
|
Corporate obligations |
|
1,018 |
|
4.12 |
|
4,280 |
|
4.51 |
|
— |
|
— |
|
4,952 |
|
6.51 |
% |
10,250 |
|
5.44 |
|
|||||
|
Other obligations |
|
— |
|
— |
|
500 |
|
5.00 |
|
— |
|
— |
|
— |
|
— |
|
500 |
|
5.00 |
|
|||||
|
Collateralized mortgage obligations |
|
10,124 |
|
2.07 |
|
100,937 |
|
2.86 |
|
— |
|
— |
|
— |
|
— |
|
111,061 |
|
2.79 |
|
|||||
|
Mortgage-backed securities |
|
— |
|
— |
|
— |
|
— |
|
24,338 |
|
3.86 |
|
845 |
|
5.42 |
|
25,183 |
|
3.91 |
|
|||||
|
Total debt securities |
|
81,871 |
|
2.79 |
|
164,617 |
|
2.53 |
|
24,338 |
|
3.86 |
|
5,797 |
|
6.35 |
|
276,623 |
|
2.80 |
|
|||||
|
Auction rate preferred stock (1) |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
5,000 |
|
2.18 |
|
|||||
|
Other‘ marketable equity securities (1) |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
6,329 |
|
4.90 |
|
|||||
|
Total securities available for sale |
|
81,871 |
|
2.79 |
|
164,617 |
|
2.53 |
|
24,338 |
|
3.86 |
|
5,797 |
|
6.35 |
|
287,952 |
|
2.84 |
|
|||||
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Other obligations |
|
250 |
|
7.00 |
|
500 |
|
6.77 |
|
— |
|
— |
|
— |
|
— |
|
750 |
|
6.85 |
|
|||||
|
Mortgage-backed securities |
|
— |
|
— |
|
82 |
|
7.98 |
|
134 |
|
8.74 |
|
377 |
|
6.29 |
|
593 |
|
7.08 |
|
|||||
|
Total securities held to maturity |
|
250 |
|
7.00 |
|
582 |
|
6.94 |
|
134 |
|
8.74 |
|
377 |
|
6.29 |
|
1,343 |
|
6.95 |
|
|||||
|
Restricted equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Federal Home Loan Bank of Boston stock |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
11,026 |
|
2.75 |
|
|||||
|
Massachusetts Savings Bank Life Insurance Company stock (1) |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
253 |
|
4.18 |
|
|||||
|
Other stock |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
122 |
|
— |
|
|||||
|
Total restricted equity securities (1). |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
11,401 |
|
2.75 |
|
|||||
|
Total securities |
|
$ |
82,121 |
|
2.80 |
% |
$ |
165,199 |
|
2.54 |
% |
$ |
24,472 |
|
3.89 |
% |
$ |
6,174 |
|
6.35 |
% |
$ |
300,696 |
|
2.85 |
% |
(1) The yields have been calculated on a tax equivalent basis.
7
Loans
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.
|
|
|
At December 31, |
|
||||||||||||||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
||||||||||
|
|
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
|
Mortgage loans: |
|
(Dollars in thousands) |
|
||||||||||||||||||
|
One-to-four family |
|
$122,524 |
|
11.00 |
% |
$134,445 |
|
15.94 |
% |
$159,887 |
|
18.25 |
% |
$114,411 |
|
15.04 |
% |
$74,889 |
|
11.13 |
% |
|
Multi-family |
|
339,998 |
|
30.53 |
|
324,755 |
|
38.50 |
|
338,973 |
|
38.70 |
|
300,841 |
|
39.55 |
|
297,270 |
|
44.18 |
|
|
Commercial real estate |
|
312,647 |
|
28.08 |
|
281,952 |
|
33.43 |
|
272,061 |
|
31.06 |
|
255,895 |
|
33.65 |
|
221,330 |
|
32.89 |
|
|
Construction and development |
|
24,813 |
|
2.23 |
|
16,691 |
|
1.98 |
|
20,901 |
|
2.38 |
|
19,947 |
|
2.62 |
|
24,719 |
|
3.67 |
|
|
Home equity |
|
12,082 |
|
1.09 |
|
10,802 |
|
1.28 |
|
8,924 |
|
1.02 |
|
6,596 |
|
0.87 |
|
5,800 |
|
0.86 |
|
|
Second |
|
43,650 |
|
3.92 |
|
36,323 |
|
4.31 |
|
29,408 |
|
3.36 |
|
27,236 |
|
3.58 |
|
16,328 |
|
2.43 |
|
|
Total mortgage loans |
|
855,714 |
|
76.85 |
|
804,968 |
|
95.44 |
|
830,154 |
|
94.77 |
|
724,926 |
|
95.31 |
|
640,336 |
|
95.16 |
|
|
Commercial loans |
|
44,207 |
|
3.97 |
|
35,096 |
|
4.16 |
|
42,637 |
|
4.87 |
|
33,205 |
|
4.36 |
|
30,514 |
|
4.54 |
|
|
Indirect automobile loans |
|
211,206 |
|
18.97 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
Other consumer loans |
|
2,401 |
|
0.21 |
|
3,409 |
|
0.40 |
|
3,130 |
|
0.36 |
|
2,488 |
|
0.33 |
|
2,012 |
|
0.30 |
|
|
Total gross loans, excluding money market loan participations |
|
1,113,528 |
|
100.00 |
% |
843,473 |
|
100.00 |
% |
875,921 |
|
100.00 |
% |
760,619 |
|
100.00 |
% |
672,862 |
|
100.00 |
% |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unadvanced funds on loans |
|
(46,777 |
) |
|
|
(39,684 |
) |
|
|
(47,157 |
) |
|
|
(43,030 |
) |
|
|
(35,746 |
) |
|
|
|
Deferred loan origination costs (fees): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect automobile loans |
|
6,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other consumer loans |
|
(265 |
) |
|
|
(364 |
) |
|
|
(404 |
) |
|
|
(1,030 |
) |
|
|
(1,550 |
) |
|
|
|
Unearned discount |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10 |
) |
|
|
|
Total loans, excluding money market loan participations |
|
1,072,740 |
|
|
|
803,425 |
|
|
|
828,360 |
|
|
|
716,559 |
|
|
|
635,556 |
|
|
|
|
Money market loan participations |
|
2,000 |
|
|
|
4,000 |
|
|
|
6,000 |
|
|
|
28,250 |
|
|
|
15,400 |
|
|
|
|
Total loans, net |
|
$1,074,740 |
|
|
|
$807,425 |
|
|
|
$834,360 |
|
|
|
$744,809 |
|
|
|
$650,956 |
|
|
|
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 and indirect automobile 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 also purchases 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 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. Two commissioned loan originators on the staff of the Company are 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.
At December 31, 2003 and 2002, multi-family and commercial real estate mortgage lending represented 58.6% and 71.9%, respectively, of gross loans, exclusive of money market loan participations. The Company intends to continue to emphasize these types of mortgage loans depending on the demand for such loans and trends in the real estate market and the economy.
Many of the Company’s borrowers have done business with the Company for years and have more than one mortgage 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 $25.0 million. At December 31, 2003, Brookline’s largest borrower had aggregate loans outstanding of $16.6 million. Including this borrower, there were 30 borrowers each with aggregate loans outstanding of $5.0 million or greater at December 31, 2003. The cumulative total of those loans was $248.3 million, or 23.2% of loans outstanding, exclusive of money market loan participations. Most of this cumulative amount is comprised of multi-family and commercial real estate mortgage loans.
8
The Company has written underwriting policies to control the inherent risks in origination of mortgage 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.
Multi-family and Commercial Real Estate Mortgage Loans
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. Generally, a yield maintenance fee and other fees are collected when a fixed-rate loan is paid off prior to its maturity.
For the past several years, a stable and then declining interest rate environment prompted many multi-family and commercial real estate borrowers to exercise their options to convert loans from an adjustable-rate to a fixed-rate basis. Additionally, many new loans originated during that time have been priced at inception on a fixed-rate basis generally for periods ranging from two to seven years. When interest rates increase during the fixed-rate phase of these loans, the Company’s net interest income is 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.
One-to-four Family Mortgage Loans
The Company offers both fixed-rate and adjustable-rate mortgage loans secured by one-to-four family residences. Generally, fixed-rate residential mortgage loans are not maintained in the Company’s loan portfolio.
Construction and Development Loans
At December 31, 2003, construction and development loans amounted to $24.8 million, $7.1 million of which had not been advanced as of that date. The $24.8 million is comprised of $6.6 million pertaining to construction of multi-family properties, $1.4 million pertaining to construction of commercial properties, $6.4 million pertaining to construction of one-to-four family residential homes, $7.0 million pertaining to construction of condominiums and $3.4 million pertaining to land loans. Different criteria are applied in underwriting construction loans for which the primary source of repayment is the sale of the property than in underwriting 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 Company 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 Company 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 Company may be confronted with a project which, upon completion, has a value that is insufficient to assure full loan repayment.
Commercial Loans
Commercial loans, which amounted to $44.2 million at December 31, 2003 compared to $35.1 million at December 31, 2002, included loans to condominium associations of $40.4 million and $30.4 million, respectively. Typically, such loans are for the purpose of funding capital improvements, are made for five to ten year terms and are secured by a general
9
assignment of the revenue of the condominium association. Among the factors considered in the underwriting of such loans are the level of owner occupancy, the financial condition and history of the condominium association, the attractiveness of the property in relation to the market in which it is located and the reasonableness of estimates of the cost of capital improvements to be made. Depending on loan size, funds are advanced as capital improvements are made and, in more complex situations, after completion of engineering inspections.
Indirect Automobile Loans
The Company commenced originating indirect automobile loans in the first quarter of 2003. At December 31, 2003, such loans amounted to $211.2 million. Indirect automobile loans are loans for automobiles (both new and used) and light duty trucks primarily to individuals, but also to corporations and other organizations.
Indirect automobile loans are originated through dealerships; the loans are assigned to the Company. The senior vice president responsible for indirect automobile lending must approve the application of any dealer with whom the Company does business. As of March 2004, the Company does business with over 100 dealerships located primarily in eastern Massachusetts. In the future, the Company may do business with dealerships located elsewhere in New England. Dealer relationships are reviewed monthly for application quality, the ratio of loans approved to applications submitted, and loan performance.
Loan applications are generated by approved dealers and data is entered into an application processing system. Two types of scorecard models are used in the underwriting process — credit bureau scorecard models and a custom scorecard model. Credit bureau scorecard models are based on data accumulated by nationally recognized credit bureaus. The models are risk assessment tools that analyze an individual’s credit history and assign a numeric credit score. The models meet the requirements of the Equal Credit Opportunity Act. The custom scorecard model is a judgmentally derived scoring model that includes features selected for analysis by the Company. It does not contain any factors prohibited by the Equal Credit Opportunity Act. Management generates reports periodically to track and monitor scorecards in use and the consistency of application processing.
The indirect automobile loan policy limits the aggregate number of loans with credit scores of less than 660 to 15% of loans outstanding. At December 31, 2003, loans with credit scores below 660 were less than 10% of loans outstanding. The average credit score of loans in the portfolio at that date exceeded 730.
The application processing system statistically grades each application according to score ranges. Depending on the data received, an application is either approved automatically or submitted to a credit underwriter for review. Credit underwriters may override system-designated approvals. Loans approved by the underwriters must meet criteria guidelines established in the Company’s loan policy. Credit profile measurements such as debt to income ratios, payment to income ratios and loan to value ratios are utilized in the underwriting process and to monitor the performance of loans falling within specified ratio ranges. Regarding loan to value ratios, the Company considers automobile loans to be essentially unsecured credits that are partially collateralized. When borrowers cease to make required payments, repossession and sale of the vehicle financed usually results in insufficient funds to fully pay the remaining loan balance.
Indirect automobile loans are assigned a particular tier based on the credit score determined by the credit bureau. The tier is used for pricing purposes only so as to assure consistency in loan pricing. Tier rates can be modified if certain conditions exist as outlined in the Company’s loan policy. The rate paid by a borrower usually differs with the rate earned by the Company. A significant part of the difference is retained by the dealer in accordance with terms agreed to between the dealer and the Company. The difference is commonly referred to as a dealer reserve. Most of the dealer reserve is paid after the end of the month in which the loan is made and is comprised of the agreed-upon rate differential multiplied by the expected average balance of the loan over its scheduled maturity. If a loan is repaid in entirety within ninety days of the loan origination date, the dealer must pay a proportionate part of the dealer reserve to the Company. If a loan is repaid after ninety days, the dealer is not obliged to repay any part of the dealer reserve amount previously received. Dealer reserves paid by the Company are amortized as a reduction of interest received from borrowers over the life of the related loans. When loans are prepaid, any remaining unamortized balance is charged to expense at that time.
Various reports are generated to monitor receipt of required loan documents, adherence to loan policy parameters, dealer performance, dealer reserves, loan delinquencies and loan charge-offs. Summary reports are submitted to the chief executive officer, the risk management officer and the board of directors on a monthly basis.
10
The following table shows the contractual maturity and repricing dates of the Company’s gross loans, net of unadvanced funds, at December 31, 2003. The table does not include prepayments or scheduled principal amortization.
|
|
|
At December 31, 2003 |
|
|||||||||||||||||||||||||
|
|
|
Real estate mortgage loans |
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
|
|
One-to- |
|
Multi- |
|
Commercial |
|
Construction |
|
Home |
|
Commercial |
|
Indirect |
|
Other |
|
Total |
|
|||||||||
|
|
|
(In thousands) |
|
|||||||||||||||||||||||||
|
Amounts due: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Within one year |
|
$ |
20,110 |
|
$ |
83,668 |
|
$ |
49,397 |
|
$ |
15,557 |
|
$ |
25,067 |
|
$ |
20,062 |
|
$ |
14 |
|
$ |
4,368 |
|
$ |
218,243 |
|
|
After one year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
More than one year to three years |
|
16,844 |
|
51,096 |
|
63,665 |
|
— |
|
548 |
|
3,138 |
|
5,826 |
|
31 |
|
141,148 |
|
|||||||||
|
More than three years to five years |
|
57,374 |
|
143,089 |
|
158,421 |
|
1,927 |
|
6,270 |
|
5,294 |
|
149,681 |
|
2 |
|
522,058 |
|
|||||||||
|
More than five years to ten years |
|
26,438 |
|
51,642 |
|
36,283 |
|
228 |
|
2,426 |
|
1,557 |
|
55,685 |
|
— |
|
174,259 |
|
|||||||||
|
More than ten years |
|
57 |
|
9,155 |
|
3,831 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
13,043 |
|
|||||||||
|
Total due after one year |
|
100,713 |
|
254,982 |
|
262,200 |
|
2,155 |
|
9,244 |
|
9,989 |
|
211,192 |
|
33 |
|
850,508 |
|
|||||||||
|
Total amount due |
|
$ |
120,823 |
|
$ |
338,650 |
|
$ |
311,597 |
|
$ |
17,712 |
|
$ |
34,311 |
|
$ |
30,051 |
|
$ |
211,206 |
|
$ |
4,401 |
|
1,068,751 |
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Deferred loan origination costs (fees): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Indirect automobile loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,254 |
|
|||||||||
|
Other loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(265 |
) |
|||||||||
|
Net loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,074,740 |
|
||||||||
(1) Comprised of $2,000 of money market loan participations and $2,401 of other consumer loans.
The following table sets forth at December 31, 2003 the dollar amount of gross loans, net of unadvanced funds, contractually due or scheduled to reprice after one year and whether such loans have fixed interest rates or adjustable interest rates.
|
|
|
Due after one year |
|
|||||||
|
|
|
Fixed |
|
Adjustable |
|
Total |
|
|||
|
|
|
(In thousands) |
|
|||||||
|
Mortgage loans: |
|
|
|
|
|
|
|
|||
|
One-to-four family |
|
$ |
2,118 |
|
$ |
98,595 |
|
$ |
100,713 |
|
|
Multi-family |
|
91,425 |
|
163,557 |
|
254,982 |
|
|||
|
Commercial real estate |
|
72,783 |
|
189,417 |
|
262,200 |
|
|||
|
Construction and development |
|
96 |
|
2,059 |
|
2,155 |
|
|||
|
Home equity and second mortgage |
|
4,772 |
|
4,472 |
|
9,244 |
|
|||
|
Total mortgage loans |
|
171,194 |
|
458,100 |
|
629,294 |
|
|||
|
Indirect automobile loans |
|
211,192 |
|
— |
|
211,192 |
|
|||
|
Commercial loans |
|
4,585 |
|
5,404 |
|
9,989 |
|
|||
|
Other consumer loans |
|
33 |
|
— |
|
33 |
|
|||
|
Total loans |
|
$ |
387,004 |
|
$ |
463,504 |
|
$ |
850,508 |
|
Non-Performing Assets and Allowance for Loan Losses
For information about the Company’s non-performing assets and allowance for loan losses, see pages 10 through 13 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2003 Annual Report to Stockholders which is incorporated herein by reference.
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. Brookline’s deposits are
11
obtained predominantly from customers in Brookline, Newton, West Roxbury and surrounding communities. Deposits are also gathered via the internet. 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 does not use brokers to obtain deposits.
The following table presents the deposit activity of the Company for the years indicated.
|
|
|
Year ended December 31, |
|
|||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||
|
|
|
|
|
|
|
|
|
|||
|
Net deposits (withdrawals) |
|
$ |
18,303 |
|
$ |
12,615 |
|
$ |
(11,260 |
) |
|
Interest credited on deposit accounts |
|
12,293 |
|
15,790 |
|
23,559 |
|
|||
|
Total increase in deposit accounts |
|
$ |
30,596 |
|
$ |
28,405 |
|
$ |
12,299 |
|
In 2001, a $67.3 million, or 22.5%, growth in transaction deposit accounts was substantially offset by a $55.0 million, or 17.8%, decline in certificates of deposit. The decline resulted primarily from significant reductions in rates offered, especially during the second half of 2001.
In 2002, transaction deposit accounts increased $13.5 million, or 3.7%, and certificates of deposit increased $14.9 million, or 5.8%, despite withdrawals of $29.3 million from deposit accounts to fund purchases of stock in the offering completed by the Company on July 9, 2002. The increases were attributable in part to marketing initiatives.
In 2003, transaction deposit accounts increased $47.1 million, or 12.4%, and certificates of deposit declined $16.5 million, or 6.1%. The increase in transaction deposits was attributable in part to marketing initiatives. The decline in certificates of deposit was due to the low interest rate environment which prompted some depositors to place their funds in higher yielding non-bank financial instruments or in transaction deposit accounts with no maturities.
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.
|
|
|
Year ended December 31, 2003 |
|
Year ended December 31, 2002 |
|
||||||||||
|
|
|
Average |
|
Percent |
|
Weighted |
|
Average |
|
Percent |
|
Weighted |
|
||
|
|
|
(Dollars in thousands) |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
NOW accounts |
|
$ |
61,673 |
|
9.29 |
% |
0.17 |
% |
$ |
73,757 |
|
11.55 |
% |
0.39 |
% |
|
Savings accounts |
|
21,792 |
|
3.28 |
|
0.59 |
|
14,439 |
|
2.26 |
|
1.00 |
|
||
|
Money market savings accounts |
|
296,714 |
|
44.70 |
|
1.54 |
|
257,257 |
|
40.30 |
|
1.85 |
|
||
|
Non-interest-bearing demand checking accounts |
|
30,063 |
|
4.53 |
|
— |
|
18,129 |
|
2.84 |
|
— |
|
||
|
Total transaction deposit accounts |
|
410,242 |
|
61.80 |
|
1.17 |
|
363,582 |
|
56.95 |
|
1.43 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Certificate of deposit accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Six months or less |
|
72,899 |
|
10.98 |
|
1.85 |
|
85,828 |
|
13.44 |
|
2.65 |
|
||
|
Over six months through 12 months |
|
68,341 |
|
10.30 |
|
2.22 |
|
74,631 |
|
11.69 |
|
3.29 |
|
||
|
Over 12 months through 24 months |
|
58,773 |
|
8.85 |
|
3.58 |
|
63,701 |
|
9.98 |
|
4.54 |
|
||
|
Over 24 months |
|
53,542 |
|
8.07 |
|
4.73 |
|
50,687 |
|
7.94 |
|
5.45 |
|
||
|
Total certificate of deposit accounts |
|
253,555 |
|
38.20 |
|
2.96 |
|
274,847 |
|
43.05 |
|
3.78 |
|
||
|
Total average deposits |
|
$ |
663,797 |
|
100.00 |
% |
1.85 |
% |
$ |
638,429 |
|
100.00 |
% |
2.44 |
% |
12
|
|
|
Year ended December 31, 2001 |
|
|||||
|
|
|
Average |
|
Percent |
|
Weighted |
|
|
|
|
|
(Dollars in thousands) |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
NOW accounts |
|
$ |
68,968 |
|
11.18 |
% |
1.18 |
% |
|
Savings accounts |
|
12,469 |
|
2.02 |
|
1.80 |
|
|
|
Money market savings accounts |
|
240,177 |
|
38.95 |
|
3.27 |
|
|
|
Non-interest-bearing demand checking accounts |
|
17,732 |
|
2.88 |
|
— |
|
|
|
Total transaction deposit accounts |
|
339,346 |
|
55.03 |
|
2.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit accounts: |
|
|
|
|
|
|
|
|
|
Six months or less |
|
86,338 |
|
14.00 |
|
4.95 |
|
|
|
Over six months through 12 months |
|
101,812 |
|
16.51 |
|
5.14 |
|
|
|
Over 12 months through 24 months |
|
43,337 |
|
7.03 |
|
5.72 |
|
|
|
Over 24 months |
|
45,786 |
|
7.43 |
|
5.84 |
|
|
|
Total certificate of deposit accounts |
|
277,273 |
|
44.97 |
|
5.29 |
|
|
|
Total average deposits |
|
$ |
616,619 |
|
100.00 |
% |
3.82 |
% |
At December 31, 2003, the Company had outstanding $64.4 million in certificate of deposit accounts of $100,000 or more, maturing as follows:
|
Maturity Period |
|
Amount |
|
Weighted |
|
|
|
|
|
(Dollars in thousands) |
|
|||
|
|
|
|
|
|
|
|
|
Three months or less |
|
$ |
19,133 |
|
2.12 |
% |
|
Over three months through six months |
|
6,368 |
|
1.98 |
|
|
|
Over six months through twelve months |
|
15,416 |
|
2.38 |
|
|
|
Over twelve months |
|
23,463 |
|
3.67 |
|
|
|
|
|
$ |
64,380 |
|
2.73 |
% |
Borrowed Funds
The Company utilizes advances from the FHLB to fund part of its loan growth and 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, certain multi-family mortgage loans and U.S. Government and Agency obligations in an aggregate amount at least equal to 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, 2003, the Company had $220.5 million in outstanding advances from the FHLB and had the capacity to increase that amount to $451.5 million.
The following table sets forth certain information regarding borrowed funds for the dates indicated:
|
|
|
Year ended December 31, |
|
|||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||
|
Advances from the FHLB: |
|
|
|
|
|
|
|
|||
|
Average balance outstanding |
|
$ |
149,125 |
|
$ |
169,733 |
|
$ |
153,002 |
|
|
Maximum amount outstanding at any month end during the year |
|
220,519 |
|
180,919 |
|
178,130 |
|
|||
|
Balance outstanding at end of year |
|
220,519 |
|
124,900 |
|
178,130 |
|
|||
|
Weighted average interest rate during the year |
|
4.23 |
% |
5.73 |
% |
6.11 |
% |
|||
|
Weighted average interest rate at end of year |
|
3.52 |
% |
4.33 |
% |
5.81 |
% |
|||
13
Return on Equity and Assets
Return on equity and assets for the years presented is as follows:
|
|
|
Year ended December 31, |
|
||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
Return on assets (net income divided by average total assets) |
|
1.00 |
% |
1.68 |
% |
1.80 |
% |
|
|
|
|
|
|
|
|
|
|
Return on equity (net income divided by average stockholders’ equity) |
|
2.36 |
% |
4.81 |
% |
6.74 |
% |
|
|
|
|
|
|
|
|
|
|
Dividend payout ratio (dividends declared per share divided by net income per share) |
|
216.00 |
% |
83.16 |
% |
63.64 |
% |
|
|
|
|
|
|
|
|
|
|
Equity to assets ratio (average stockholders’ equity divided by average total assets) |
|
42.57 |
% |
35.04 |
% |
26.79 |
% |
Subsidiary Activities
Brookline is a wholly-owned subsidiary of the Company. Information as to when it was established and its activities is included elsewhere in Part I of this document.
Brookline Securities Corp. (“BSC”) is a wholly-owned subsidiary of the Company and BBS Investment Corporation (“BBS”) is a wholly-owned subsidiary of Brookline. 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 Brookline. At December 31, 2003, BSC and BBS had total assets of $204.9 million and $101.2 million, respectively, of which $204.3 million and $100.8 million, respectively, were in investment securities and short-term investments.
160 Associates, Inc. (“Associates”), a wholly-owned subsidiary of Brookline 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, was liquidated in December 31, 2003. Brookline Preferred Capital Corporation (“BPCC”), a 99.9% owned subsidiary of Associates established as a real estate investment trust (“REIT”) engaged in the acquisition and holding of securities and mortgage loans, was also liquidated in December 31, 2003. These companies were liquidated because of a change in the Massachusetts law in 2003 that eliminated the favorable state tax treatment previously accorded to REITs.
Personnel
As of December 31, 2003, the Company had 119 full-time employees and 8 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.
Website Posting of Exchange Act Reports
The Company makes available as soon as practicable and free of charge its annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K (and amendments to such reports), that are filed with the Securities and Exchange Commission. The Company’s website address is https://www.brooklinebank.com.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) was enacted to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board that will enforce auditing, quality control and independence standards and will be funded by fees from all publicly traded companies, Sarbanes-Oxley places certain restrictions on the scope of services that may be provided by accounting firms to their public company audit clients. Sarbanes-Oxley requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement.
Although the Company is incurring additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that the additional expense will have a material impact on its results of operations or financial condition.
14
Supervision and Regulation
General
The Bank is regulated, examined and supervised by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”). This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. The OTS examines the Bank and prepares reports for the consideration of its board of directors on any operating deficiencies. The Bank’s relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s mortgage documents.
Any change in these laws or regulations, whether by the FDIC, the OTS or Congress, could have a material adverse impact on the Company and the Bank and their operations.
Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the OTS. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets. The Bank also may establish subsidiaries that may engage in activities not otherwise permissible for the Bank, including real estate investment and securities and insurance brokerage.
Capital Requirements. OTS regulations require federal savings banks to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for associations receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio. The prompt corrective action standards discussed below, in effect, establish a minimum 2% tangible capital standard.
The risk-based capital standard for federal savings banks requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS capital regulation based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.
At December 31, 2003, the Bank’s capital exceeded all applicable requirements.
Loans-to-One Borrower. A federal savings bank generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus on an unsecured basis. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, but generally does not include real estate. As of December 31, 2003, the Bank was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings bank, the Bank is subject to a qualified thrift lender, or “QTL,” test. Under the QTL test, the Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12 month period. “Portfolio assets” generally means total assets of a federal savings bank, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the bank’s business.
“Qualified thrift investments” includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of portfolio assets. “Qualified thrift investments” also include 100% of a federal savings bank’s credit card loans, education loans and small business loans.
15
A federal savings bank that fails the qualified thrift lender test must either convert to a bank charter or operate under specified restrictions. At December 31, 2003, the Bank maintained 71.0% of its portfolio assets in qualified thrift investments.
Capital Distributions. OTS regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the capital account. A federal savings bank must file an application for approval of a capital distribution if:
• the total capital distributions for the applicable calendar year exceed the sum of the bank’s net income for that year to date plus the association’s retained net income for the preceding two years;
• the bank would not be at least adequately capitalized following the distribution;
• the distribution would violate any applicable statute, regulation, agreement or OTS-imposed condition; or
• the bank is not eligible for expedited treatment of its filings.
Even if an application is not otherwise required, every federal savings bank that is a subsidiary of a holding company must still file a notice with the OTS at least 30 days before the board of directors declares a dividend or approves a capital distribution.
The OTS may disapprove a notice or application if:
• the bank would be undercapitalized following the distribution;
• the proposed capital distribution raises safety and soundness concerns; or
• the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
Liquidity. A federal savings bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.
Community Reinvestment Act and Fair Lending Laws. All federal savings banks have a responsibility under the Community Reinvestment Act and related regulations of the OTS to help meet the credit needs of their communities, including low and moderate-income neighborhoods. In conducting bank examinations, the OTS is required to assess a bank’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. The Bank received an outstanding Community Reinvestment Act rating in its most recent examination conducted by the OTS.
Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its “affiliates” is limited by OTS regulations and by Sections 23A and 23B of the Federal Reserve Act (the “FRA”). The term “affiliates” for these purposes generally means any company that controls or is under common control with an institution. The Company and its non-savings bank subsidiaries are affiliates of the Bank. In general, transactions with affiliates must be on terms that are as favorable to the bank as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the bank’s capital. In addition, OTS regulations prohibit a bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary.
The Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. In addition, extensions of credit in excess of certain limits must be approved by the Bank’s board of directors.
16
Enforcement. The OTS has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties”. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day.
Standards for Safety and Soundness. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement safety and soundness standards required under federal law. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.
Prompt Corrective Action Regulations. The OTS is required and authorized to take supervisory actions against undercapitalized savings institutions. For this purpose, a federal savings bank is placed in one of the following five categories based on the bank’s capital:
• well-capitalized (at least 5% leverage capital, 6% tier 1 risk-based capital and 10% total risk-based capital);
• adequately capitalized (at least 4% leverage capital, 4% tier 1 risk-based capital and 8% total risk-based capital);
• undercapitalized (less than 8% total risk-based capital, 4% tier 1 risk-based capital or 3% leverage capital);
• significantly undercapitalized (less than 6% total risk-based capital, 3% tier 1 risk-based capital or 3% leverage capital); and
• critically undercapitalized (less than 2% tangible capital).
Generally, the banking regulator is required to appoint a receiver or conservator for a bank that is “critically undercapitalized.” The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a bank receives notice that it is “undercapitalized”, “significantly undercapitalized” or “critically undercapitalized”. In addition, numerous mandatory supervisory actions become immediately applicable to the bank, including, but not limited to, restrictions on growth, investment activities, capital distributions and affiliate transactions. The OTS may also take any one of a number of discretionary supervisory actions against undercapitalized banks, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At December 31, 2003, the Bank met the criteria for being considered “well-capitalized.”
Insurance of Deposit Accounts. Deposit accounts in the Bank are insured by the Bank Insurance Fund of the FDIC, generally up to a maximum of $100,000 per separately insured depositor. The Bank’s deposits therefore are subject to FDIC deposit insurance assessments. The FDIC has adopted a risk-based system for determining deposit insurance assessments. The FDIC is authorized to raise the assessment rates as necessary to maintain the required ratio of reserves to insured deposits of 1.25%.
Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the bank or its affiliates or not obtain services of a competitor of the bank.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Boston, the Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever is greater. As of December 31, 2003, the Bank was in compliance with this requirement.
Brookline Bancorp, Inc. is a grandfathered federally chartered bank holding company and, therefore, is limited to the activities permissible for financial holding companies or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance, incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and certain additional activities authorized by OTS regulations.
Federal law prohibits a federally chartered bank company, directly or indirectly, or through one or more subsidiaries, from acquiring control of another savings institution or holding company thereof, without prior written approval of the OTS. It also prohibits the acquisition or retention of, with specified exceptions, more than 5% of the equity securities of a company engaged in activities that are not closely related to banking or financial in nature or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources, future prospects of the savings institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.
In October 2001, the USA PATRIOT Act became effective. Title III of that Act represents a major expansion of the U.S. anti-money laundering laws granting broad new anti-money laundering powers to the Secretary of the Treasury and imposing a variety of new compliance obligations on banks and broker dealers. The Act also requires a bank’s regulator to specifically consider a bank’s past record of compliance with the bank Secrecy Act (anti-money laundering requirements) when acting on any applications filed by such bank.
Taxation
General. The Company and the Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company or the Bank.
The Company and the Bank have not had their federal income tax returns audited by the Internal Revenue Service during the past five years.
Method of Accounting. For federal income tax purposes, the Company reports its income and expenses on the accrual method of accounting and uses a fiscal year ending December 31 for filing its consolidated federal income tax returns.
Taxable Distributions and Recapture. Bad debt reserves created prior to November 1, 1988 are subject to recapture into taxable income should the Bank make certain non-dividend distributions or cease to maintain a bank charter. At December 31, 2003, the Bank’s total federal pre-1988 reserve was $1.8 million. This reserve reflects the cumulative effects of federal tax deductions by the Bank for which no federal income tax provision has been made.
Minimum Tax. The Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”). The AMT is payable to the extent such AMT exceeds regular income tax. In general, net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Company has not been subject to the alternative minimum tax and has no such amounts available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2003, the Company had no net operating loss carry forwards for federal income tax purposes.
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Corporate Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations.
State Taxation
Massachusetts State Taxation. For Massachusetts income tax purposes, a consolidated tax return cannot be filed. Instead, the Company, the Bank and each of their subsidiaries file separate annual income tax returns. The Company and the Bank are subject to an annual Massachusetts excise tax at a rate of 10.50% of their net income. For these purposes, Massachusetts net income is defined as gross income from all sources without any exclusions, less the following deductions: all deductions (but not credits) which are allowable under the Internal Revenue Code of 1986, except for those deductions under the Internal Revenue Code relating to (1) dividends received, (2) losses sustained in other taxable years and (3) taxes on or measured by income, franchise taxes for the privilege of doing business and capital stock taxes imposed by any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States or any foreign country, or a political subdivision of any of the foregoing. The Company and the Bank are not permitted to carry their losses forward or back for Massachusetts tax purposes. BBS Investment Corporation, the Bank’s wholly-owned subsidiary, and Brookline Securities Corp., the Company’s wholly-owned subsidiary, are securities corporations and, accordingly, are subject to an excise tax at the rate of 1.32% of their gross income.
In January 1997, the Bank incorporated Brookline Preferred Capital Corp. (“BPCC”) which elected to be taxed as a real estate investment trust (“REIT”). BPCC is 99.9% owned by 160 Associates, Inc. (“Associates”), a wholly-owned subsidiary of the Bank.
As explained more fully in Note 10 of the Notes to the Company’s Consolidated Financial Statements and in the sub-section entitled Settlement of Real Estate Investment Trust (“REIT”) Tax Dispute on page 7 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2003 Annual Report, which is incorporated herein by reference, the treatment of earnings of Associates and BPCC, for Massachusetts income tax purposes, was adversely affected by a new Massachusetts law enacted on March 5, 2003. That law denies a dividend received deduction for dividend distributions from a REIT in determining Massachusetts taxable income. The law not only disallowed dividend received deductions for the year 2003 and thereafter, but also disallowed dividend received deductions retroactively to tax years beginning in 1999. The Company disputed the retroactive tax assessments. Ultimately, the Company settled the dispute by paying $4.3 million to the Commonwealth of Massachusetts, which resulted in an after-tax charge to earnings of $2.8 million in 2003.
Item 2. Properties
The main office branch is owned by the Bank. The other branches and operations center of the Bank and space in Newton, Massachusetts used to conduct the Bank’s indirect automobile lending business are leased from unrelated third parties. At December 31, 2003, the net book value of premises and leasehold improvements was $1.5 million. Refer to Note 12 of the Notes to Consolidated Financial Statements in the Company’s Annual Report to Stockholders, which is incorporated herein by reference, for information regarding the Company’s lease commitments at December 31, 2003.
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
Item 5. Market For The Registrant’s Common Stock And Related Stockholder 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, 2003, 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 years ended December 31, 2003 and 2002, appears on the inside of the back cover page of the Company’s 2003 Annual Report to Stockholders which is incorporated herein by reference.
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Item 6. Selected Consolidated Financial Data
Selected Consolidated Financial Data of the Company appears on the back of the cover page and page 1 of the Company’s 2003 Annual Report to Stockholders 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 1 through 17 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2003 Annual Report to Stockholders 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 14 through 16 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2003 Annual Report to Stockholders 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 2003 Annual Report to Stockholders which is incorporated herein by reference:
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Reports of Independent Certified Public Accountants |
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Consolidated Balance Sheets as of December 31, 2003 and 2002 |
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Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001 |
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Consolidated Statements of Comprehensive Income for the years ended December 31, 2003, 2002 and 2001 |
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Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2003, 2002 and 2001 |
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Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 |
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Notes to Consolidated Financial Statements |
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The supplementary data required by this Item relating to selected quarterly financial data is provided in Note 20 of the Notes to Consolidated Financial statements included in Item 8 of Part II of this Report.
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosures
On January 17, 2003, the Registrant elected to change its outside accounting firm, Grant Thornton LLP (“Grant Thornton”). The Registrant engaged KPMG LLP (“KPMG”) as its new accounting firm. The decision to change accounting firms was recommended by the audit committee of the Board of Directors and approved by the Board of Directors.
Grant Thornton’s report on the consolidated financial statements of the Registrant for each of the two years in the period ended December 31, 2002 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the two years ended December 31, 2002, the Registrant had no disagreement with Grant Thornton on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which disagreement, if not resolved to the satisfaction of Grant Thornton, would have caused it to make reference to the subject matter of the disagreements in connection with its report.
None of the reportable events described by Item 304(a)(1)(v) of Regulation S-K has occurred.
Grant Thornton has furnished the Registrant with a letter in response to Item 304(a) of Regulation S-K. Such letter is included in this report as Exhibit 16.1.
KPMG was engaged by the Registrant on January 17, 2003 to audit the consolidated financial statements of the Registrant as of and for the year ended December 31, 2003. During the two years ended December 31, 2002, the Registrant did not consult with KPMG regarding any of the matters set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.
Item 9A. Controls and Procedures
Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and
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procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to (a) ensure that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and forms and (b) in timely alerting them to the material information relating to the Company (or its consolidated subsidiaries) required to be included in its periods SEC filings.
There has been no change in the Company’s internal control over financial reporting during the Company’s fourth quarter of the year ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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 15, 2004 which is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item is presented under the heading “Proposal I - Election of Directors” on pages 3 through 17 of the Company’s proxy statement dated March 15, 2004 which is incorporated herein by reference.
Item 12. Security Ownership Of Certain Beneficial Owners And Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management is presented on pages 2 and 3 of the Company’s proxy statement dated March 15, 2004 which is incorporated herein by reference.
Item 13. Certain Relationships And Related Transactions
Certain Relationships and Related Transactions are presented on page 17 of the Company’s proxy statement dated March 15, 2004 which is incorporated herein by reference.
Item 14. Principal Accountant and Fees
The disclosure required by this Item is set forth under the heading “Proposal 2-Ratification of Appointment of Auditors” on pages 17 and 18 of the Company’s proxy statement dated March 15, 2004 which is incorporated herein by reference.
Item 15. 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: The exhibits listed below are filed herewith or incorporated herein by reference to other filings.
EXHIBIT INDEX
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Exhibit |
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Description |
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3.1 |
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Certificate of Incorporation of Brookline Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to a previously filed Registration Statement)* |
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3.2 |
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Bylaws of Brookline Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to a previously filed Registration Statement)* |
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4 |
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Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4 to a previously filed Registration Statement)* |
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10.1 |
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Form of Employment Agreement (incorporated by reference to Exhibit 10.1 to a previously filed Registration Statement)** |
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10.2 |
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Form of Change in Control Agreement |
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10.3 |
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Supplemental Retirement Income Agreement with Richard P. Chapman, Jr. (incorporated by reference to Exhibit 10.3 to a previously filed Registration Statement)** |
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10.4 |
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Supplemental Retirement Income Agreement with Charles H. Peck (incorporated by reference to Exhibit 10.5 to a previously filed Registration Statement)** |
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10.5 |
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Amended Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.6 to Form 10-K filed on March 23, 2000 and Exhibit 10.6 to Form 10-Q filed on November 14, 2000) |
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10.6 |
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Sixth and Seventh Amendment to Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.6 to Form 10-K filed on March 25, 2002) |
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11 |
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Statement Regarding Computation of Per Share Earnings - incorporated herein by reference to Note 14 of the Notes to Consolidated Financial Statements on page F-29 of the Company’s 2003 Annual Report to Stockholders - Exhibit 13 to this report. |
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13 |
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2003 Annual Report to Stockholders |
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14 |
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Code of Ethics |
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16 |
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Letter Regarding Change in Certifying Accountant (incorporated by reference to Exhibit 16.1 of Form 8-K filed on January 24, 2003) |
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16.1 |
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Letter from Certifying Accountant in Response to Item 304(a) of Regulation S-K (incorporated by reference to Exhibit 16.1 of Form 10-K filed on March 24, 2003) |
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Subsidiaries of the Registrant - This information is presented in Part I, Item 1. Business - Subsidiary Activities of this Report. |
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23 |
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Independent Auditors’ Consent |
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23.1 |
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Consent of Independent Certified Public Accountants |
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31.1 |
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Certification of Chief Executive Officer |
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31.2 |
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Certification of Chief Financial Officer |
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32.1 |
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Section 1350 Certification of Chief Executive Officer |
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32.2 |
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Section 1350 Certification of Chief Financial Officer |
* Registration Statement on Form S-1 filed by the Company with the Securities and Exchange Commission on April 10, 2002 (Registration No. 333-85980)
** Registration Statement on Form S-1 filed by the Company with the Securities and Exchange Commission on November 18, 1997 (Registration No. 333-40471)
(b) Reports on Form 8-K
A Form 8-K was filed on October 17, 2003 to furnish a copy of the press release announcing the Company’s earnings for the third quarter of 2003, stock awards under the Company’s 2003 Recognition and Retention Plan and declaration of a regular quarterly dividend of $ 0.085 per share.
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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.
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Date: March 10, 2004 |
By: |
/s/ Richard P. Chapman, Jr. |
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Richard P. Chapman, Jr. |
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President and Chief Executive Officer |
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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.
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By: |
/s/ Richard P. Chapman, Jr. |
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By: |
/s/ Paul R. Bechet |
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Richard P. Chapman, Jr., President, Chief |
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Paul R. Bechet, Senior Vice President, Treasurer |
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Executive Officer and Director |
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and Chief Financial Officer |
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(Principal Executive Officer) |
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(Principal Financial and Accounting Officer) |
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Date: March 10, 2004 |
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Date: March 10, 2004 |
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By: |
/s/ Oliver F. Ames |
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By: |
/s/ Hollis W. Plimpton |
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Oliver F. Ames, Director |
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Hollis W. Plimpton, Director |
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By: |
/s/ Dennis S. Aronowitz |
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By: |
/s/ Joseph J. Slotnik |
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Dennis S. Aronowitz, Director |
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Joseph J. Slotnik, Director |
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By: |
/s/ George C. Caner, Jr. |
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By: |
/s/ William V. Tripp, III |
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George C. Caner, Jr., Director |
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William V. Tripp, III, Director |
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By: |
/s/ David C. Chapin |
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By: |
/s/Rosamond B. Vaule |
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David C. Chapin, Director |
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, Director |
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By: |
/s/ William G. Coughlin |
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By: |
/s/ Peter O. Wilde |
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William G. Coughlin, Director |
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Peter O. Wilde, Director |
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By: |
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By: |
/s/ Franklin Wyman, Jr. |
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John L. Hall, II, Director |
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Franklin Wyman, Jr., Director |
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By: |
/s/ Charles H. Peck |
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Charles H. Peck, Director |
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