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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from
---------------- to ----------------
Commission file number: 0-23695
BROOKLINE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3402944
(State or other jurisdiction of incorporation of organization) (I.R.S. Employer Identification No.)
160 Washington Street, Brookline, MA 02447-0469
(Address of principal executive offices) (Zip Code)
(617) 730-3500
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, par value of $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
The number of shares of common stock held by nonaffiliates of the
registrant as of March 23, 1999 was 12,808,913 for an aggregate market value of
$142,499,158. This excludes 15,420,350 shares held by Brookline Bancorp, MHC and
381,237 shares held by Brookline Savings Bank Employee Stock Ownership Plan and
Trust.
At March 23, 1999, the number of shares of common stock, par value $.01 per
share, issued and outstanding were 29,095,000 and 28,610,500, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of the Annual Report to Stockholders for the year ended December
31, 1998 (Part II and Part III)
2. Proxy Statement for 1999 Annual Meeting of Stockholders (Part III)
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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-K
Index
Part I Page
Item 1. Business 1
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission Of Matters To A Vote Of Security Holders 20
Part II
Item 5. Market For The Registrant's Common Stock And
Related Security Holder Matters 21
Item 6. Selected Consolidated Financial Data 21
Item 7. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations 21
Item 7a. Quantitative And Qualitative Disclosures About Market Risk 21
Item 8. Financial Statements And Supplementary Data 21
Item 9. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosures 21
Part III
Item 10. Directors and Executive Officers Of The Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership Of Certain Beneficial Owners
And Management 22
Item 13. Certain Relationships And Related Transactions 22
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 22
Signatures 24
PART I
Item 1. Business
General
Brookline Bancorp, Inc. (the "Company") is a bank holding company
incorporated in Massachusetts that was organized in November 1997 for the
purpose of acquiring all of the capital stock of Brookline Savings Bank (the
"Bank") upon completion of the Bank's reorganization from a mutual savings bank
into a mutual holding company structure. The Bank is a Massachusetts savings
bank established in 1871.
As part of the reorganization, the Company offered for sale 47%
of the shares of its common stock in an offering fully subscribed for by
eligible depositors of the Bank (the "Offering"). The remaining 53% of the
Company's shares of common stock were issued to Brookline Bancorp, MHC (the
"MHC"), a state-chartered mutual holding company incorporated in Massachusetts.
The reorganization and Offering were completed on March 24, 1998. Prior to that
date, the Company had no assets and liabilities.
Completion of the Offering resulted in the issuance of 29,095,000
shares of common stock, 15,420,350 shares (53%) of which were issued to the MHC
and 13,674,650 shares (47%) of which were sold to eligible depositors of the
Bank at $10.00 per share. The net proceeds of the Offering were $134.8 million.
The Company contributed 50% of the net proceeds to the Bank for general
corporate use and retained the other 50%. The Company used the net proceeds it
retained to fund a loan to the Bank's employee stock ownership plan, acquire
investment securities and repurchase shares of the Company's common stock in the
open market.
Market Area and Credit Risk Concentration
The Bank operates five full-service banking offices in the Town
of Brookline, an urban/suburban community adjacent to the City of Boston, and a
loan production office in Worcester, Massachusetts opened in July 1998.
Worcester is the second largest city in New England. The Bank's deposits are
gathered from the general public primarily in the Town of Brookline and
surrounding communities. The Bank's lending activities are concentrated
primarily in the greater Boston metropolitan area and eastern Massachusetts. The
opening of the Worcester office has expanded the Bank's lending activities in
central Massachusetts. The greater Boston metropolitan area benefits from the
presence of numerous institutions of higher learning, medical care and research
centers and the corporate headquarters of several significant mutual fund
investment companies. Eastern Massachusetts also has many high technology
companies employing personnel with specialized skills. These factors affect the
demand for residential homes, multi-family apartments, office buildings,
shopping centers, industrial warehouses and other commercial properties.
The Bank's urban and suburban market area is characterized by a
large number of apartment buildings, condominiums and office buildings. As a
result, for many years, the Bank has emphasized multi-family and commercial real
estate mortgage lending. These types of loans typically generate higher yields,
but also involve greater credit risk than one-to four-family mortgage loans.
Many of the Bank's borrowers have more than one muti- family or commercial real
estate loan outstanding with the Bank. Moreover, the loans are concentrated in
the market area described in the preceding paragraph.
Economic Conditions and Governmental Policies
The earnings and business of the Company are affected by external
influences such as general economic conditions and the policies of governmental
authorities, including the Federal Reserve Board. The Federal Reserve Board
regulates the supply of money and bank credit to influence general economic
conditions throughout the
1
United States. The instruments of monetary policy employed by the Federal
Reserve Board affect interest rates earned on investment securities and loans
and interest rates paid on deposits and borrowed funds.
Repayment of loans made by the Bank, in particular multi-family
and commercial real estate loans, generally is dependent on sufficient income
from the properties to cover operating expenses and debt service. Accordingly,
the asset quality of the Bank's loan portfolio is greatly affected by the
economy in the Bank's market area. During the past few years, the Massachusetts
economy has been strong and interest rates have been declining. While these
conditions, for the most part, have had a favorable impact on property values
and the business of the Bank and its borrowers, declining interest rates have
prompted many borrowers to refinance existing loans and seek new loans at lower
interest rates fixed for longer periods of time. Besides causing pressure on the
Bank's interest rate margin, the low interest rate environment has resulted in
minimal deposit growth as customers have found other investment instruments more
attractive. During the late 1980s and early 1990s, a regional recession and a
higher interest rate environment caused a significant decline in employment and
in real estate values, ultimately resulting in the failure of many financial
institutions in Massachusetts and New England.
Competition
The Bank faces significant competition both in making loans and
in attracting deposits. The Boston metropolitan area has a high density of
financial institutions, many of which are branches of significantly larger
institutions which have greater financial resources than the Bank, and all of
which are competitors of the Bank to varying degrees. The Bank's competition for
loans comes principally from commercial banks, savings banks, savings and loan
associations, mortgage banking companies, credit unions, insurance companies and
other financial service companies. Its most direct competition for deposits has
historically come from commercial banks, savings banks, savings and loan
associations and credit unions. The Bank faces additional competition for
deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions.
Supervision and Regulation
General
The Company and the Bank are subject to extensive regulation
under federal and state banking laws and regulations. Both must obtain
regulatory approvals prior to entering into certain transactions including, but
not limited to, mergers with and acquisitions of other financial institutions.
The following discussion of certain of the material elements of the regulatory
framework applicable to banks and bank holding companies is not intended to be
complete and is qualified in its entirety by the text of the relevant federal
and state statutes and regulations. Changes in applicable laws and regulations
could have a material effect on the business of the Company and the Bank.
As a bank holding company, the Company is subject to
comprehensive regulation and examination by the Board of Governors of the
Federal Reserve System (the "FRB") under the Bank Holding Company Act of 1956,
as amended (the "BHC Act"). The Company is required to file reports with the FRB
concerning its activities and financial condition. As a Massachusetts
corporation, the Company is also subject to regulation by the Massachusetts
Division of Banks (the "Division").
The Bank is subject to extensive regulation and examination by
the Division, as its chartering agency, and the Federal Deposit Insurance
Corporation (the "FDIC"), as its insurer of deposits to the extent permitted by
law. The Bank is required to file reports with, and is examined periodically by,
the Division and the FDIC concerning its activities and financial condition. The
Bank is also a member of the Federal Home Loan Bank of Boston (the "FHLB").
2
Bank Holding Company Regulation
General. The FRB has extensive enforcement authority over bank
holding companies, including, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to require that
a holding company divest subsidiaries (including its bank subsidiaries). In
general, enforcement actions may be initiated for violations of law and
regulations and unsafe or unsound practices against the company, its
subsidiaries, and officers, directors and other institution-affiliated parties.
The Company must obtain the approval of the FRB and the
Massachusetts Board of Bank Incorporation before (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares (unless it already owns or controls the majority of such shares),
(ii) acquiring all or substantially all of the assets of another bank or bank
holding company or (iii) merging or consolidating with another bank holding
company.
Bank holding companies are generally prohibited from engaging in
non-banking activities, subject to certain exceptions. As a bank holding
company, the Company's activities are limited generally to the business of
banking and activities determined by the FRB to be so closely related to banking
as to be a proper incident thereto. The Company cannot engage, directly,
indirectly or in any manner, in any real estate investment or development
activities without the prior approval of the FRB.
Interstate Banking and Branching. Federal law permits adequately
capitalized and managed bank holding companies to acquire control of banks in
any state subject to certain deposit and other limitations. Further, banks in
Massachusetts are allowed by federal and state law to establish and maintain
branches through a merger or consolidation with or by the purchase of the whole
or any part of the assets or stock of any out-of-state bank or through de novo
branch establishment in any state other than Massachusetts. Since the
Massachusetts law is reciprocal, financial institutions in states with
reciprocity arrangements could enter Massachusetts through acquisition of or
merger with a Massachusetts financial institution or through establishment of
branches.
Transactions with Affiliates. The Bank and its subsidiaries are
subject to a number of regulatory restrictions, including certain restrictions
regarding (i) extensions of credit to the Company and the Company's nonbanking
affiliates (collectively with the Company, the "Affiliates"); (ii) the purchases
of assets from Affiliates; (iii) the issuance of a guarantee or acceptance of a
letter of credit on behalf of Affiliates; and (iv) investments in stock or other
securities issued by Affiliates or acceptance thereof as collateral for an
extension of credit. Further, all transactions among the Company and its direct
and indirect subsidiaries must be made on an arm's length basis and fair market
terms.
Massachusetts Bank Regulation
General. As a Massachusetts-chartered savings bank, the Bank is
subject to supervision, regulation and examination by the Division and to
various Massachusetts statutes and regulations which govern, among other things,
investment powers, lending and deposit-taking activities, borrowings,
maintenance of surplus and reserve accounts, distribution of earnings and
payment of dividends. In addition, the Bank is subject to Massachusetts consumer
protection and civil rights laws and regulations. The Division's approval is
required for a Massachusetts bank to establish or close branches, merge with
other banks, organize a holding company, issue stock and undertake certain other
activities.
Any Massachusetts bank that does not operate in accordance with
the regulations, policies and directives of the Massachusetts Commissioner of
Banks (the "Commissioner") may be subject to sanctions for non-compliance
including, among other things, suspension or revocation of its charter. The
Commissioner may, under certain circumstances, suspend or remove officers or
directors who have violated the law, conducted the Bank's business in a manner
unsafe, unsound or contrary to depositors' interests, or been negligent in the
performance of their duties.
3
Bank Powers and Investment Activities. Generally, Massachusetts
banks have powers equivalent to those of national banks. In addition, the Bank
may invest in preferred and common stock of any corporation provided such
investments do not involve control of any corporation and do not, in the
aggregate, exceed 4% of the Bank's deposits. Subject to certain limits, the Bank
may also invest in investments not otherwise legally permitted.
Depositors Insurance Fund. All Massachusetts-chartered savings
banks are required to be members of the Depositors Insurance Fund (the "DIF"), a
corporation that insures savings bank deposits not covered by federal deposit
insurance. The DIF is authorized to charge savings banks an annual assessment of
up to 1/16th of 1% of a savings bank's deposits insured by the DIF.
Federal Deposit Insurance Corporation
The FDIC insures the Bank's deposit accounts to the $100,000
maximum per separately insured account. The Bank is subject to regulation,
examination and supervision by and the reporting requirements of the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") made extensive changes to the federal banking law. Among other
things, FDICIA requires federal bank regulatory agencies to take prompt
corrective action to address the problems of under-capitalized banks. FDICIA
also amended statutes governing extensions of credit to directors, executive
officers and principal stockholders of banks and their holding companies.
Prompt Corrective Action
The federal banking agencies have promulgated regulations to
implement the system of prompt corrective action required by federal law. Under
the regulations, a bank shall be deemed to be (i) "well capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
"Undercapitalized" banks are subject to growth, capital
distribution (including dividend) and other limitations and are required to
submit a capital restoration plan. A bank's compliance with such plan is
required to be guaranteed by any company that controls the undercapitalized
institution. If an "undercapitalized" bank fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks are subject to one or more of a number of additional
restrictions, including an order by the FDIC to sell sufficient voting stock to
become adequately capitalized, requirements to reduce total assets and cease
receipt of deposits from correspondent banks or to dismiss directors or
officers, and restrictions on interest rates paid on deposits, compensation of
executive officers and capital distributions by a parent holding company.
Based on the foregoing, the Company is currently classified as
"well capitalized".
4
Standards for Safety and Soundness
The federal agencies have adopted Interagency Guidelines
Prescribing Standards for Safety and Soundness ("Guidelines"). The Guidelines
set forth standards for use by federal banking agencies to identify and address
problems at insured depository institutions before capital becomes impaired. The
standards address internal controls and information systems, internal audit
program, credit underwriting, loan documentation, interest rate risk exposure,
asset growth, and compensation, fees and benefits. The standards also require
institutions to examine asset quality and earnings standards. If a federal
banking agency determines that an institution fails to meet any of the
prescribed standards, the agency may require the institution to submit to the
agency an acceptable plan to achieve compliance with the standards.
Limitations on Dividends and Other Capital Transactions
The FRB has issued a policy statement expressing their view that
a bank holding company should pay cash dividends only to the extent that its net
income for the past year is sufficient to cover both the cash dividends and a
rate of earnings retention that is consistent with the holding company's capital
needs, asset quality and overall financial condition. The FRB may prohibit a
bank holding company from paying any dividends if its bank subsidiary is
classified as "undercapitalized."
The FRB has imposed certain restrictions regarding the waiving of
dividend payments by the Company to its mutual holding company parent. To date,
the mutual holding company has not waived any dividends paid by the Company. If,
in the future, the mutual holding company sought to waive dividends paid by the
Company and obtained the approval of the FRB to do so, the cumulative amount of
waived dividends would not be available for payment by the Company to minority
stockholders and would be maintained in a restricted capital account. While such
account would not have to be reflected in the Company's financial statements, it
would not be available for distribution to minority stockholders if the mutual
holding company parent decided to convert to stock form in the future.
The FDIC has the authority to use its enforcement powers to
prohibit a savings bank from paying dividends if, in its opinion, the payment of
dividends would constitute an unsafe and unsound practice. Federal law also
prohibits the payment of dividends by a bank that will result in the bank
failing to meet its applicable capital requirements. Massachusetts law also
restricts the Bank from declaring a dividend that would reduce its capital below
(i) the amount required to be maintained by state and federal law and
regulations or (ii) the amount of the Bank's liquidation account established in
connection with the Bank's reorganization.
Under the Division's regulations, the Company is prohibited from
repurchasing any shares of its stock within three years of its date of issuance
unless the repurchase is limited to stock repurchases of no greater than 5% of
the Company's stock where compelling and valid business reasons are established
to the satisfaction of the Commissioner. On October 20, 1998, the Company
received the approval of the Commissioner to repurchase up to 5% of its
outstanding common stock, or 1,454,750 shares. There is no time limit by which
the Company must repurchase the shares.
Community Reinvestment Act
Under the Community Reinvestment Act (the "CRA") and a
Massachusetts statutory counterpart, the Bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The Bank is subject to examination by the FDIC and the Division
regarding its compliance with CRA requirements. The Bank's latest ratings from
examinations conducted by the FDIC and the Division were "satisfactory."
5
Financial Modernization
Various federal legislative proposals are pending to "modernize"
the nation's financial system. Although the proposals vary, most generally would
expand the powers of financial institutions by permitting a combination of
banking and commercial functions.
Federal Securities Law
The common stock of the Company is registered with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act"). The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act. The Company is also required to file annual, quarterly and
periodic reports with the SEC.
Federal Home Loan Bank System
The Federal Home Loan Bank system functions as a reserve credit
source for its member financial institutions and is subject to the regulation
and oversight of the Federal Housing Finance Board. The Bank is a voluntary
member of the Federal Home Loan Bank of Boston ("FHLB"). As a member, the Bank
is required to own FHLB capital stock that is directly proportionate to its home
mortgage loans and borrowings from the FHLB. All borrowings from the FHLB are
required to be fully secured by sufficient collateral as determined by the FHLB.
Investment Securities
The investment policy of the Company is reviewed and approved by
the Board of Directors on an annual basis. The Company's investment portfolio is
structured so as to provide asset diversification, interest and dividend income,
a source of liquidity to meet loan demand and potential deposit outflows, and
the opportunity to achieve capital appreciation through long-term investment in
equity securities.
The Bank's current policy generally favors investment in U.S.
Government and Agency securities, corporate debt obligations and corporate
equities. The policy permits investment in mortgage-backed and mortgage-related
securities and allows the use of interest rate swaps, options and futures, but
only for purposes of hedging the interest or credit risk of specific Company
assets. While the Company has seldom used hedging instruments, at December 31,
1998, it was a party to a $5.0 million interest-rate swap agreement that matures
April 14, 2005. The Company entered into the agreement to match more closely the
repricing of certain assets and liabilities and to reduce its exposure to
increases in interest rates.
For the past few years, the Company's investment strategy has
emphasized the purchase of U.S. Government and Agency obligations and corporate
debt obligations generally maturing within two years. The Company's investment
policy generally requires that corporate obligations be rated "A" or better at
the time of acquisition. In certain instances, corporate obligations rated "BBB"
can be purchased. At December 31, 1998, only $2.0 million of the Company's debt
securities were rated "BBB" or "Baa".
At December 31, 1998, the Company's marketable equity securities
portfolio totaled $30.6 million, including net unrealized gains of $22.7
million. Most of the portfolio was comprised of the stocks of national and
regional money center banks, Freddie Mac and utility companies. The Company's
policy limits the aggregate carrying value of marketable equity securities to no
more than 25% of the Company's stockholder's equity, excluding net unrealized
gains on securities available for sale. The Company purchases marketable equity
securities as long-term investments that can provide the opportunity for capital
appreciation and dividend income that is taxed on a more favorable basis than
operating income. There can be no assurances that investment in marketable
equity securities will achieve appreciation in value and, therefore, such
investments involve higher risk.
6
In the latter part of 1998, the Company commenced purchasing
collateralized mortgage obligations with expected maturities in the two-to-four
year range. These securities were purchased for their yield which compared
favorably to yields on other debt instruments available for comparable periods
of time.
The following table sets forth the composition of the Company's debt
and equity securities portfolios at the dates indicated:
At December 31,
----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Percent Percent Percent
Amount of total Amount of total Amount of total
-------- -------- ------- -------- -------- --------
(Dollars in thousands)
Debt securities:
U.S. Government and Agency obligations... $ 92,824 35.69% $82,319 44.07% $ 70,055 43.12%
Corporate obligations.................... 124,609 47.91 71,480 38.26 65,808 40.50
Collateralized mortgage obligations
and mortgage-backed securities........ 6,891 2.65 1,265 0.68 2,764 1.70
-------- ------- ------- ------ -------- -------
Total debt securities.................. 224,324 86.25 155,064 83.01 138,627 85.32
Marketable equity securities................ 30,595 11.76 28,017 15.00 20,365 12.54
Restricted equity securities................ 5,174 1.99 3,721 1.99 3,481 2.14
-------- ------- ------- ------ -------- -------
Total securities....................... $260,093 100.00% $186,802 100.00% $162,473 100.00%
======== ======= ======== ====== ======== =====
Debt and equity securities available for sale $133,529 51.34% $117,637 62.98% $117,372 72.24%
Debt securities held to maturity............ 121,390 46.67 65,444 35.03 41,620 25.62
Restricted equity securities................ 5,174 1.99 3,721 1.99 3,481 2.14
-------- ------- ------- ------ -------- -------
Total securities....................... $260,093 100.00% $186,802 100.00% $162,473 100.00%
======== ======= ======== ====== ======== =======
The increase in the investment portfolio from $186.8 million at the
end of 1997 to $260.1 million at the end of 1998 resulted from placement of a
significant amount of the net proceeds from the Offering in debt securities.
Over time, the Company expects to reduce the percentage of its assets in debt
securities as growth takes place in the loan portfolio.
7
The following table sets forth certain information regarding the
amortized cost and market values of the Company's investment securities at the
dates indicated:
At December 31,
--------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- --------------------
Amortized Market Amortized Market Amortized Market
cost value cost value cost value
------- -------- ------- -------- -------- --------
(Dollars in thousands)
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations... $ 88,186 $ 88,810 $ 74,088 $ 74,287 $ 57,089 $ 57,104
Corporate obligations.................... 8,218 8,183 15,341 15,333 39,890 39,903
Collateralized mortgage obligations...... 5,982 5,941 - - - -
-------- -------- -------- -------- -------- --------
Total debt securities.................. 102,386 102,934 89,429 89,620 96,979 97,007
Marketable equity securities................ 7,939 30,595 6,168 28,017 6,703 20,365
-------- -------- -------- -------- -------- --------
Total securities available for sale.... 110,325 133,529 95,597 117,637 103,682 117,372
Net unrealized gains on securities
available for sale........................ 23,204 - 22,040 - 13,690 -
-------- -------- -------- -------- -------- --------
Total securities available for sale, net $133,529 $133,529 $117,637 $117,637 $117,372 $117,372
======== ======== ======== ======== ======== ========
Securities held to maturity:
U.S. Government and Agency obligations...... $ 4,014 $ 4,038 $ 8,032 $ 8,032 $ 12,951 $ 12,953
Corporate obligations....................... 116,426 117,012 56,147 56,254 25,905 25,935
Mortgage-backed securities.................. 950 993 1,265 1,314 2,764 2,807
-------- -------- -------- -------- -------- --------
Total securities held to maturity........ $121,390 $122,043 $ 65,444 $ 65,600 $ 41,620 $ 41,695
======== ======== ======== ======== ======== ========
Restricted equity securities:
Federal Home Loan Bank of Boston stock...... $ 4,921 $ 3,468 $ 3,228
Massachusetts Savings Bank Life Insurance
Company stock............................. 253 253 253
-------- -------- --------
Total restricted equity securities....... $ 5,174 $ 3,721 $ 3,481
======== ======== ========
8
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company's
securities portfolio as of December 31, 1998.
At December 31, 1998
-----------------------------------------------------------------
After one year After five years
One year or less through five years through ten years
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
Carrying average Carrying average Carrying average
value yield value yield value yield
------- ------- ------- -------- -------- --------
(Dollars in thousands)
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations......... $47,265 4.84% $ 41,545 4.89% $ - - %
Corporate obligations.......................... 999 6.12 6,665 5.59 - -
Collateralized mortgage obligations............ - - 5,941 5.74 - -
------- -------- ----
Total debt securities........................ 48,264 4.87 54,151 5.07 - -
------- -------- ----
Marketable equity securities(1)...................
Total securities available for sale..........
Securities held to maturity:
U.S. Government and Agency obligations............ 4,014 5.82 - - - -
Corporate obligations............................. 41,903 6.19 74,023 5.73 500 5.82
Mortgage-backed securities........................ - - - - 366 8.22
------- -------- -----
Total securities held to maturity............ 45,917 6.16 74,023 5.73 866 6.83
------- -------- -----
Restricted equity securities:
Federal Home Loan Bank of Boston stock............
Massachusetts Savings Bank Life Insurance
Company stock(1).............................
Total restricted equity securities(1)........
------- -------- ------
Total securities............................. $94,181 5.50% $128,174 5.45% $ 866 6.83%
======= ======== ======
At December 31, 1998
------------------------------------------
After ten years Total
-------------------- --------------------
Weighted Weighted
Carrying average Carrying average
value yield value yield
-------- -------- -------- --------
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations......... $ - - % $ 88,810 4.86%
Corporate obligations.......................... 519 5.59 8,183 5.65
Collateralized mortgage obligations............ - - 5,941 5.74
------ --------
Total debt securities........................ 519 5.59 102,934 4.98
------
Marketable equity securities(1)................... 30,595 2.40
--------
Total securities available for sale.......... 133,529 4.39
--------
Securities held to maturity:
U.S. Government and Agency obligations............ - - 4,014 5.82
Corporate obligations............................. - - 116,426 5.90
Mortgage-backed securities........................ 584 9.16 950 8.80
------ -------
Total securities held to maturity............ 584 9.16 121,390 5.92
------ --------
Restricted equity securities:
Federal Home Loan Bank of Boston stock............ 4,921 6.50
Massachusetts Savings Bank Life Insurance
Company stock(1)............................. 253 4.18
--------
Total restricted equity securities(1)........ 5,174 6.39
------ --------
Total securities............................. $1,103 7.48% $260,093 5.14%
====== ========
- - ------------------
(1) The yields have been calculated on a tax equivalent basis.
9
Loans
The Company's loan portfolio consists primarily of first mortgage
loans secured by multi-family, commercial and one-to-four family residential
real estate properties located in the Company's primary lending area. Another
component of the loan portfolio consists of participations in commercial loans
to national companies and organizations originated and serviced primarily by
money center banks. Generally, the participations mature between one day and
three months and are viewed by the Company as an alternative short-term
investment for liquidity management purposes rather than as traditional
commercial loans. The Company also provides financing for construction and
development projects, commercial lines of credit primarily to condominium
associations, home equity and second mortgage loans and other consumer loans.
The Company relies on community contacts as well as referrals from
existing customers, attorneys and other real estate professionals to generate
business within its lending area. In addition, existing borrowers are an
important source of business since many of its multi-family and commercial real
estate customers have more than one loan outstanding with the Company. A
commissioned loan originator on the staff of the Company is also used to
generate residential mortgage loan business. The Company's ability to originate
loans depends on the strength of the economy, trends in interest rates, customer
demands and competition.
Multi-family and commercial real estate mortgage lending are the
Company's most significant areas of lending activities. At December 31, 1998 and
1997, such loans represented 79.9% and 76.4 %, respectively, of gross loans,
exclusive of money market loan participations. The Company intends to continue
to emphasize these types of loans depending on the demand for such loans and
trends in the real estate market and the economy.
The Company has written underwriting policies to control the inherent
risks in origination of loans. The policies address approval limits,
loan-to-value ratios, appraisal requirements, debt service coverage ratios, loan
concentration limits and other matters relevant to loan underwriting.
A number of factors are considered in originating multi-family and
commercial real estate mortgage loans. The qualifications and financial
condition of the borrower (including credit history), profitability and
expertise, as well as the value and condition of the underlying property, are
evaluated. When evaluating the qualifications of the borrower, the Company
considers the financial resources of the borrower, the borrower's experience in
owning or managing similar property and the borrower's payment history with the
Company and other financial institutions. Factors considered in evaluating the
underlying property include the net operating income of the mortgaged premises
before debt service and depreciation, the debt service coverage ratio (the ratio
of net operating income to debt service) and the ratio of the loan amount to the
appraised value.
Frequently, multi-family and commercial real estate mortgage loans are
made for five to ten year terms, with an amortization period of twenty to
twenty-five years, and are priced on an adjustable-rate basis with the
borrower's option to fix the interest rate for the first few years. At the
borrower's option, at the time of origination or later during the term, the loan
may be converted to a fixed rate, provided the fixed-rate period selected by the
borrower does not exceed the original term of the loan. When fixed-rate loans
are prepaid, in addition to collecting a normal fee, a "yield maintenance" fee
is also collected when loans are paid prior to the maturity of their fixed-rate
period.
During the past two years, and in particular the second half of
1998, a stable and then declining interest rate environment prompted many
multi-family and commercial real estate borrowers to exercise their options to
convert their adjustable-rate loans to a fixed-rate basis for several years.
Additionally, many new loans were priced at inception on a fixed-rate basis
generally for periods ranging from two to seven years. If interest rates
increase during the fixed-rate phase of these loans, net interest income
relating to these loans would be negatively affected. Occasionally, the Company
has partially funded loans originated on or converted to a fixed-rate basis by
borrowing funds from the FHLB on a fixed-rate basis for periods that approximate
the fixed-rate terms of the loans.
The Company offers both fixed-rate and adjustable-rate mortgage loans
secured by one-to-four family residences. Fixed-rate residential mortgage loans
are not maintained in the Company's loan portfolio.
10
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,
----------------------------------------------------------------------------
1998 1997 1996
----------------------- ---------------------- -----------------------
Percent Percent Percent
Amount of total Amount of total Amount of total
--------- --------- ------- --------- -------- ---------
(Dollars in thousands)
Mortgage loans:
One-to-four family............. $ 64,467 11.19% $ 68,907 14.25% $ 57,725 13.08%
Multi-family................... 262,678 45.58 219,909 45.50 200,368 45.40
Commercial real estate......... 197,593 34.29 149,540 30.94 139,430 31.60
Construction and development... 17,255 2.99 13,382 2.77 7,261 1.65
Home equity.................... 5,505 .96 5,276 1.09 6,398 1.45
Second......................... 13,944 2.42 15,855 3.28 19,872 4.50
--------- ------ --------- ------- --------- ------
Total mortgage loans......... 561,442 97.43 472,869 97.83 431,054 97.68
Commercial loans................. 13,051 2.26 9,074 1.88 9,221 2.09
Consumer loans................... 1,775 0.31 1,393 0.29 1,023 0.23
--------- ------ --------- ------- --------- ------
Total gross loans, excluding money
market loan participations. 576,268 100.00% 483,336 100.00% 441,298 100.00%
====== ====== ======
Less:
Unadvanced funds on loans...... (26,096) (9,352) (11,950)
Deferred loan origination fees. (1,604) (1,562) (1,326)
Unearned discounts............. (10) (10) (289)
--------- --------- ---------
Total loans, excluding money
market loan participations. 548,558 472,412 427,733
Money market loan participations. 44,300 24,000 52,950
--------- --------- ---------
Total loans, net $ 592,858 $ 496,412 $ 480,683
========= ========= =========
At December 31,
-------------------------------------------------
1995 1994
----------------------- ----------------------
Percent Percent
Amount of total Amount of total
--------- --------- ------- ---------
(Dollars in thousands)
Mortgage loans:
One-to-four family............. $ 56,814 13.62% $ 57,792 14.62%
Multi-family................... 193,812 46.46 184,537 46.68
Commercial real estate......... 125,363 30.05 114,923 29.07
Construction and development... 10,288 2.47 8,096 2.05
Home equity.................... 7,420 1.78 7,791 1.97
Second......................... 17,680 4.24 17,369 4.40
--------- ----- --------- ------
Total mortgage loans......... 411,377 98.62 390,508 98.79
Commercial loans................. 4,584 1.10 3,062 0.77
Consumer loans................... 1,192 0.28 1,722 0.44
--------- ----- --------- ------
Total gross loans, excluding money
market loan participations. 417,153 100.00% 395,292 100.00%
====== ======
Less:
Unadvanced funds on loans...... (9,879) (8,158)
Deferred loan origination fees. (1,012) (767)
Unearned discounts............. (731) (731)
--------- ---------
Total loans, excluding money
market loan participations. 405,531 385,636
Money market loan participations. 43,100 36,400
--------- ---------
Total loans, net $ 448,631 $ 422,036
========= =========
11
Many of the Company's borrowers have done business with the Company
for years and have more than one loan outstanding. It is the Company's current
policy that the aggregate amount of loans outstanding to any one borrower or
related entities may not exceed 8.0% of the Bank's core capital (stockholders'
equity exclusive of unrealized gains or losses on securities available for sale,
net of income taxes) which, at December 31, 1998, amounted to $203.9 million. At
December 31, 1998, the largest borrower had aggregate loans outstanding of $13.7
million, or 6.7% of core capital. Including this borrower, there were 17
borrowers each with aggregate loans outstanding at December 31, 1998 in excess
of $5.0 million, the cumulative total of which was $116.5 million, or 21.2% of
loans outstanding, exclusive of money market loan participations. Most of this
cumulative amount is comprised of multi-family and commercial real estate
mortgage loans.
The following table shows the contractual maturity and repricing dates
of the Company's loan portfolio at December 31, 1998. The table does not include
prepayments or scheduled principal amortization.
At December 31, 1998
----------------------------------------------------------------------------------------
Real estate mortgage loans
------------------------------------------------------ Other
Home Money commercial
One-to- Commercial Construction equity and market and
four Multi- real and second loan consumer Total
family family estate development mortgage participations loans loans
-------- -------- -------- ---------- -------- -------------- --------- ---------
(In thousands)
Amounts due(1):
Within one year.................... $ 21,219 $ 66,525 $ 55,450 $ 9,857 $11,407 $44,300 $ 4,703 $ 213,461
-------- -------- -------- ------- ------- ------- ------- ---------
After one year:
More than one year to three years.. 39,297 29,448 21,244 - 1,374 - 1,876 93,239
More than three years to five years 3,755 100,905 63,921 - 658 - 3,285 172,524
More than five years to ten years. 101 55,346 48,167 117 1,509 - 322 105,562
More than ten years............... 95 2,892 6,584 - - - 115 9,686
-------- -------- -------- ------- ------- ------- ------- ---------
Total due after one year......... 43,248 188,591 139,916 117 3,541 - 5,598 381,011
-------- -------- -------- ------- ------- ------- ------- ---------
Total amount due................. $ 64,467 $255,116 $195,366 $ 9,974 $14,948 $44,300 $10,301 594,472
======== ======== ======== ======= ======= ======= =======
Less:
Deferred loan origination fees. (1,604)
Unearned discounts............. (10)
----------
Net loans.................... $ 592,858
=========
- - ---------------
(1) Amounts due are net of unadvanced funds on loans.
The following table sets forth at December 31, 1998 the dollar amount
of gross loans contractually due or scheduled to reprice after one year and
whether such loans have fixed interest rates or adjustable interest rates.
Due After One Year
--------------------------------
Fixed Adjustable Total
--------- --------- ---------
(In thousands)
Real estate mortgage loans:
One-to-four family................................................... $ 507 $ 42,741 $ 43,248
Multi-family......................................................... 77,549 111,042 188,591
Commercial real estate............................................... 79,062 60,854 139,916
Construction and development......................................... 117 - 117
Home equity and second mortgage...................................... 2,091 1,450 3,541
--------- --------- ---------
Total real estate mortgage loans.................................. 159,326 216,087 375,413
Commercial and consumer loans.......................................... 3,097 2,501 5,598
--------- --------- ---------
Total loans....................................................... $ 162,423 $ 218,588 $ 381,011
========= ========= =========
12
Non-Performing Assets and Restructured Loans
The following table sets forth information regarding non-performing
assets and restructured loans at the dates indicated.
At December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(Dollars in thousands)
Non-accrual loans (1):
Mortgage loans:
One-to-four family................................................ $ - $ 230 $ 428 $ 736 $ 296
Multi-family...................................................... - - 253 - 120
Commercial real estate............................................ 297 522 646 - -
Construction and development...................................... - - 6 6 763
Home equity....................................................... 35 51 - - 98
Commercial loans..................................................... - - - - -
Consumer loans....................................................... - - 4 6 7
-------- ------- ------- ------- ------
Total non-accrual loans........................................... 332 803 1,337 748 1,284
Other real estate owned, net (2)....................................... 1,940 2,373 1,689 1,722 1,805
-------- ------- ------- ------- ------
Total non-performing assets....................................... $ 2,272 $ 3,176 $ 3,026 $2,470 $3,089
======== ======= ======= ======= ======
Restructured loans..................................................... $ - $ 2,287 $ 5,438 $10,922 $5,728
======== ======= ======= ======= ======
Allowance for loan losses as a percent of total loans.................. 2.21% 2.51% 2.56% 2.75% 2.91%
Allowance for loan losses as a percent of total non-performing loans(3) 3,943.98 1552.05 921.91 1,647.86 955.92
Non-performing loans as a percent of total loans....................... 0.01 0.16 0.28 0.17 0.30
Non-performing assets as a percent of total assets..................... 0.26 0.45 0.45 0.39 0.51
(1) Non-accrual loans include all loans 90 days or more past due and other
loans which have been identified by the Company as presenting uncertainty
with respect to the collectibility of interest or principal.
(2) Other real estate owned balances are shown net of related loss allowances.
(3) Non-performing loans are comprised of non-accrual loans.
Loans are placed on non-accrual status either when reasonable doubt
exists as to the full timely collection of interest and principal or
automatically when a loan becomes past due 90 days.
At December 31, 1998, other real estate owned consisted of two
industrial properties carried at $1.9 million and residential condominium units
carried at $181,000, net of an aggregate valuation allowance of $186,000. For
the years ended December 31, 1998, 1997 and 1996, the Company received income,
net of expenses, of $259,000, $254,000 and $198,000, respectively, from the
rental of the two industrial properties. The Company expects to sell the
properties at prices in excess of their carrying value. Ultimate net sales
proceeds will depend on market conditions in effect at the time of sale. The
condominium units have been sold, but continue to be included in other real
estate owned until cash payments by the purchaser are sufficient to meet the
criteria for recording the transaction as a sale.
Restructured loans represent performing loans for which concessions
(such as reductions of interest rates to below market terms and/or extension of
repayment terms) were granted due to a borrower's financial condition. Based on
satisfactory payment performance, a significant pay-down of loan principal and
payment of interest at market rates, loans previously classified as restructured
were removed from that category in 1998.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for
loan losses based on management's on-going evaluation of the risks inherent in
the Company's loan portfolio. Factors considered in the evaluation process
include growth of the loan portfolio, the risk characteristics of the types of
loans in the portfolio, geographic and
13
large borrower concentrations, current regional economic and real estate market
conditions that could affect the ability of borrowers to pay, the value of
underlying collateral, and trends in loan delinquencies and charge-offs.
The Company utilizes an internal rating system to monitor and evaluate
the credit risk inherent in its loan portfolio. At the time of loan approval,
all loans other than one-to-four family residential mortgage loans, home equity
loans and consumer loans, are assigned a rating based on all the factors
considered in originating the loan. In the latter part of 1996, the Company
expanded the number of its loan ratings from five to eight. The initial loan
rating is recommended by the loan officer and approved by the individuals or
committee responsible for approving the loan. Loan officers are expected to
recommend to the Loan Committee changes in loan ratings when facts come to their
attention that warrant an upgrade or downgrade in a loan rating. Problem and
potential problem assets are assigned the three highest ratings. Such ratings
coincide with the "Substandard", "Doubtful" and "Loss" classifications used by
federal regulators in their examination of financial institutions. Generally, an
asset is considered Substandard if it is inadequately protected by the current
net worth and paying capacity of the obligors and/or the collateral pledged.
Substandard assets include those characterized by the distinct possibility that
the insured financial institution will sustain some loss if the deficiencies are
not corrected. Assets classified as Doubtful have all the weaknesses inherent in
those classified Substandard with the added characteristic that the weaknesses
present make collection or liquidation in full, on the basis of currently
existing facts, highly questionable and improbable. Assets classified as Loss
are those considered uncollectible and of such little value that their
continuance as assets without the establishment of a specific loss reserve
and/or charge-off is not warranted. Assets which do not currently expose the
insured financial institution to sufficient risk to warrant classification in
one of the aforementioned categories but possess weaknesses are designated
"Special Mention." The Bank assigns its fourth highest rating to loans meeting
this designation.
On a quarterly basis, management reviews with the Watch Committee the
status of each loan assigned one of the Company's four adverse internal ratings,
including the specific and general valuation allowances for losses deemed
prudent. General valuation allowances represent loss allowances established to
recognize the inherent risk associated with lending activities which, unlike
specific allowances, have not been allocated to particular problem loans. Loans,
or portions of loans, classified Loss are either charged-off against valuation
allowances or a specific allowance is established in an amount equal to the
amount classified Loss.
The Company's classification of its loans and the amount of the
valuation allowances it sets aside for estimated losses is subject to review by
the FDIC and the Division. Based on their reviews, these agencies can order the
establishment of additional general or specific loss allowances. The FDIC, in
conjunction with the other federal banking agencies, has adopted an interagency
policy statement on allowances for loan and lease losses. The policy statement
provides guidance for financial institutions on both the responsibilities of
management for the assessment and establishment of adequate allowances and
guidance for banking agency examiners to use in determining the adequacy of a
financial institution's valuation methodology. Generally, the policy statement
recommends that financial institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management analyze
all significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management establish acceptable valuation processes
that meet the objectives set forth in the policy statement. While the Company
believes that it has established an adequate allowance for loan losses, there
can be no assurance that the regulators, in reviewing the Company's loan
portfolio, will not request the Company to materially increase its allowances
for loan losses. Although management believes that adequate specific and general
loan loss allowances have been established, actual losses are dependent upon
future events and, as such, further additions to the level of specific and
general loss allowances could become necessary.
14
The following table sets forth activity in the Company's allowance for
loan losses for the periods set forth in the table.
Year ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
(In thousands)
Balance at beginning of period.............. $ 12,463 $ 12,326 $ 12,236 $ 12,274 $ 12,745
Provision (credit) for loan losses.......... 300 - - - (477)
Charge-offs:
Mortgage loans:
One-to-four family...................... - - - - 3
Multi-family............................ - - - - 13
Commercial real estate.................. - - 151 237 -
Construction and development............ - - - - -
Home equity............................. - - - - -
Second mortgage......................... - - - - -
Commercial loans.......................... - - - - -
Consumer loans............................ 1 6 15 3 24
Money market loan participations.......... - - - - -
-------- --------- --------- --------- --------
Total charge-offs..................... 1 6 166 240 40
-------- --------- --------- --------- --------
Recoveries:
Mortgage loans:
Multi-family............................ - 25 140 271 31
Commercial real estate.................. 293 8 - 6 5
Construction and development............ - 103 21 - -
Consumer loans............................ 5 7 5 15 10
-------- --------- --------- --------- --------
Total recoveries...................... 332 143 166 292 46
-------- --------- --------- --------- --------
Net recoveries.............................. 331 137 - 52 6
-------- --------- -------- --------- --------
Balance at end of period.................... $ 13,094 $ 12,463 $ 12,326 $ 12,326 $ 12,274
======== ========= ========= ========= ========
The following tables set forth the Company's percent of allowance by
loan category and the percent of loans to total loans in each of the categories
listed at the dates indicated.
At December 31,
----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ----------------------------- ------------------------------
Percent Percent Percent
of loans of loans of loans
Percent of in each Percent of in each Percent of in each
allowance category allowance category allowance category
to total to gross to total to gross to total to gross
Amount allowance loans Amount allowance loans Amount allowance loans
------- --------- -------- ------ --------- -------- ------ ---------- --------
(Dollars in thousands)
Mortgage loans:
One- to four-family........... $ 226 1.73% 11.19% $ 241 1.93% 14.26% $ 202 1.64% 13.08%
Multi-family.................. 3,610 27.57 45.58 2,993 24.02 45.50 2,725 22.11 45.40
Commercial real estate........ 4,214 32.18 34.29 3,376 27.09 30.94 3,256 26.42 31.60
Construction and development.. 526 4.02 2.99 384 3.08 2.77 463 3.76 1.65
Home equity................... 55 .42 .96 53 .43 1.09 64 0.52 1.45
Second........................ 70 .53 2.42 79 .63 3.28 99 0.80 4.50
Commercial loans................. 379 2.89 2.26 95 .76 1.87 110 0.89 2.09
Consumer loans................... 18 .14 .31 14 .11 .29 10 0.08 0.23
Money market loan participations. - - - - - - - - -
Unallocated...................... 3,996 30.52 - 5,228 41.95 - 5,397 43.78 -
------- ------ ------ ------- ------ ------ ------- ------ ------
Total allowance for loan losses $13,094 100.00% 100.00% $12,463 100.00% 100.00% 12,326 100.00% 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ======
15
At December 31,
-----------------------------------------------------------------------------------
1995 1994
------------------------------------------- --------------------------------------
Percent Percent
of loans of loans
Percent of in each Percent of in each
allowance category allowance category
to total to gross to total to gross
Amount allowance loans Amount allowance loans
-------- ---------- -------- ------- ----------- ----------
(Dollars in thousands)
Mortgage loans:
One- to four-family............ $ 199 1.61% 13.62% $ 202 1.65% 14.62%
Multi-family................... 3,177 25.78 46.46 2,956 24.08 46.68
Commercial real estate......... 2,695 21.86 30.05 2,534 20.64 29.07
Construction and development... 504 4.09 2.47 445 3.63 2.05
Home equity.................... 74 0.60 1.78 78 0.63 1.97
Second......................... 133 1.08 4.24 130 1.06 4.39
Commercial loans................. 92 0.75 1.10 61 0.50 0.78
Consumer loans................... 12 0.10 0.28 17 0.14 0.44
Money market loan participations. - - - - - -
Unallocated...................... 5,440 44.13 - 5,851 47.67 -
-------- ------ ------ -------- ------ ------
Total allowance for loan losses $ 12,326 100.00% 100.00% $ 12,274 100.00% 100.00%
======== ====== ====== ======== ====== ======
The amounts allocated to loan categories in the above table are
determined by consideration of several factors. Specific amounts are allocated
on a loan-by-loan basis for any impairment loss as determined by applying one of
the three methods cited in generally accepted accounting principles. In
addition, general reserves are established based on long-term trends in loan
charge-offs by category and the total of loans according to the Company's
internal ratings.
At December 31, 1998, there were no loans which warranted specific
reserves. Regarding charge-offs, the Company has experienced recoveries at least
equal to or in excess of charge-offs in each of the past five years. The Company
believes this favorable experience is attributable to the robust economy of the
past few years and is not sustainable over normal lending cycles. Accordingly,
the Company has continued to apply charge-off percentages in line with
experience over longer-term lending cycles. Finally, higher general reserves are
applied to loans with ratings above the Company's two best internal ratings.
At December 31, 1998, loans designated as Substandard and Special
Mention totaled $2.3 million and $1.9 million, respectively. No loans were
designated as Doubtful or Loss. The Substandard category included 7 loans, the
two largest of which were $958,000 and $873,000, respectively. The two loans are
secured by office buildings. Loan payments are current and the estimated market
value of the underlying collateral exceeds the loan balances. The Special
Mention category is comprised of a $1.9 million loan secured by an office
building. The loan is adequately secured and payments are current.
During 1998, the allowance for loan losses was increased by $631,000
as a result of net loan recoveries of $331,000 and a provision for loan losses
of $300,000. The Company increased the allowance primarily because of
significant growth of the loan portfolio, substantially all of which pertained
to the higher risk areas of multi-family and commercial real estate mortgage
lending. Total loan growth amounted to $76.1 million exclusive of the increase
in money market loan participations.
For the past several years, a portion of the Company's allowance for
loan losses has been categorized as unallocated rather than being allocated to
specific loan categories. The unallocated part of the allowance has been
maintained in recognition of the inherent risks resulting from the following
concentrations in the Company's portfolio: the significance of loans pertaining
to multi-family apartment buildings and commercial real estate properties, the
geographic location of such properties and the aggregate amount of loans
outstanding to larger borrowers. The combination of these three concentrations
creates a higher than normal degree of risk in the Company's loan portfolio. A
downturn in economic conditions in the Company's primary lending area could have
adverse consequences on the collectibility of the loan portfolio in a relatively
short period of time.
16
The decline in the unallocated portion of the allowance in 1998 is
attributable to the loan growth mentioned above and the fact that most of the
new loan production did not warrant the two best internal ratings. Such ratings
are typically assigned to only a few new loans and to seasoned loans with
excellent credit performance. The Company has no established range into which
the unallocated portion of the allowance should fall. Instead, the
reasonableness of the unallocated portion is considered based on management's
collective assessment of all the factors cited in the beginning of this section.
Deposits
Historically, deposits have been the Company's primary source of
funds. The Company offers a variety of deposit accounts with a range of interest
rates and terms. The Company's deposit accounts consist of non-interest-bearing
checking accounts and interest-bearing NOW accounts, savings accounts and money
market savings accounts (referred to in the aggregate as "transaction deposit
accounts") and certificate of deposit accounts. The Company offers Individual
Retirement Accounts ("IRAs") and other qualified plan accounts.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and the
relative attractiveness of competing deposit and investment alternatives. During
the past few years, the strength of the stock market has affected deposit flows
as some customers have opted to place their funds in instruments such as mutual
funds rather than in deposit products perceived to have less attractive returns.
The Company's deposits are obtained predominantly from customers in the Town of
Brookline and surrounding communities. The Company relies primarily on
competitive pricing of its deposit products, customer service and long-standing
relationships with customers to attract and retain deposits. Market interest
rates and rates offered by competing financial institutions significantly affect
the Company's ability to attract and retain deposits. The Company uses
traditional means of advertising its deposit products, including transit and
print media, and generally does not solicit deposits from outside its market
area. The Company does not use brokers to obtain deposits.
The following table presents the deposit activity of the Company for
the periods indicated.
Year ended December 31,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
(In thousands)
Net withdrawals................................ $ (14,132) $ (23,403) $ (13,073)
Interest credited on deposit accounts.......... 21,198 21,691 22,874
---------- ---------- ----------
Total increase (decrease) in deposit accounts.. $ 7,066 $ (1,712) $ 9,801
========== ========== ==========
17
The following table sets forth the distribution of the Company's
average deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented. Averages for the periods
presented utilize average daily balances.
Year ended December 31, 1998 Year ended December 31, 1997
------------------------------ --------------------------------
Percent Percent
of total Weighted of total Weighted
Average average average Average average average
balance deposits rate balance deposits rate
-------- -------- -------- ------- -------- ---------
(Dollars in thousands)
NOW accounts........................................... $ 39,766 8.33% 1.55% $ 37,544 7.79% 1.72%
Savings accounts....................................... 14,510 3.04 2.45 15,063 3.13 2.50
Money market savings accounts.......................... 164,134 34.39 3.87 158,578 32.90 3.85
Non-interest-bearing demand checking accounts.......... 11,908 2.50 - 9,890 2.05 -
--------- ------ --------- -------
Total transaction deposit accounts................. 230,318 48.26 3.18 221,075 45.87 3.22
--------- ------ --------- -------
Certificate of deposit accounts:
Six months or less................................... 63,273 13.26 5.09 67,691 14.05 5.20
Over six months through 12 months.................... 103,478 21.68 5.40 107,490 22.30 5.44
Over 12 months through 24 months..................... 27,369 5.73 5.62 28,196 5.85 5.75
Over 24 months....................................... 52,850 11.07 6.25 57,516 11.93 6.31
--------- ------ --------- -------
Total certificate of deposit accounts.............. 246,970 51.74 5.51 260,893 54.13 5.58
--------- ------ --------- -------
Total average deposits............................. $ 477,288 100.00% 4.39% $ 481,968 100.00% 4.50%
========= ====== ========= ======
Year ended December 31, 1996
----------------------------------
Percent
of total Weighted
Average average average
balance deposits rate
--------- -------- --------
(Dollars in thousands)
NOW accounts........................................... $ 37,095 7.72% 1.73%
Savings accounts....................................... 17,302 3.60 2.46
Money market savings accounts.......................... 154,541 32.16 3.85
Non-interest-bearing demand checking accounts.......... 9,595 2.00 -
--------- ------
Total transaction deposit accounts................. 218,533 45.48 3.21
--------- ------
Certificate of deposit accounts:
Six months or less................................... 67,402 14.02 5.20
Over six months through 12 months.................... 107,064 22.28 5.60
Over 12 months through 24 months..................... 32,298 6.72 5.84
Over 24 months....................................... 55,243 11.50 6.09
--------- ------
Total certificate of deposit accounts.............. 262,007 54.52 5.63
--------- ------
Total average deposits............................. $ 480,540 100.00% 4.53%
========= ======
A declining interest rate environment during the past two years has
resulted in some shifting of deposits from certificate of deposit accounts to
more liquid and shorter term transaction deposit accounts and only a modest
amount of deposit growth. The attractiveness of deposits to customers has
diminished as customers have viewed other financial instruments such as mutual
funds, annuities and the stock market as offering greater earnings potential.
While the Company is not anticipating any significant reduction in its deposits,
it has ample liquidity and access to funds to process deposit outflows if such a
trend were to arise.
18
The following table presents, by various rate categories, the amount
of certificate of deposit accounts outstanding at the dates indicated.
Period to maturity from December 31, 1998
-----------------------------------------------------------------------
Less Three Four
than One to Two to to to At
one two three four five December 31,
year years years years years 1998
--------- -------- -------- ------- ------- ----------
(In thousands)
Certificate of deposit accounts:
4.01% to 5.00%................... $ 63,088 $ 3,386 $ - $ - $ - $ 66,474
5.01% to 6.00%................... 126,022 17,894 9,676 2,011 3,788 159,391
6.01% to 7.00%................... 3,101 1,137 2,521 3,693 - 10,452
7.01% to 7.50%................... 2,417 9,320 - - - 11,737
--------- -------- -------- ------- ------- ----------
Total............................ $ 194,628 $ 31,737 $ 12,197 $ 5,704 $ 3,788 $ 248,054
========= ======== ======== ======= ======= ==========
At December 31, 1998, the Company had outstanding $47.8 million in
certificate of deposit accounts of $100,000 or more, maturing as follows:
Weighted
Amount average rate
-------- ------------
(Dollars in thousands)
Maturity Period
- - ---------------
Three months or less............................ $ 12,564 5.12%
Over three months through six months............ 10,720 5.15
Over six months through twelve months........... 16,140 5.49
Over twelve months.............................. 8,374 6.17
--------
$ 47,798 5.42%
========
Borrowed Funds
The Company utilizes advances from the FHLB primarily in connection
with its management of the interest rate sensitivity of its assets and
liabilities. The advances are collateralized primarily by certain of the
Company's mortgage loans and secondarily by the Company's investment in the
stock of the FHLB. The maximum amount that the FHLB will advance to member
institutions, including the Company, fluctuates from time to time in accordance
with the policies of the FHLB. At December 31, 1998, the Company had $94.4
million in outstanding advances from the FHLB and had the capacity to increase
that amount to $300.9 million. The Company expects to continue to utilize
borrowings from the FHLB as part of its management of the interest sensitivity
of its assets and liabilities.
The following table sets forth certain information regarding borrowed
funds for the dates indicated:
Year ended December 31,
-----------------------------------
1998 1997 1996
--------- -------- --------
(Dollars in thousands)
Advances from the FHLB:
Average balance outstanding................................. $ 78,295 $ 63,771 $ 55,497
Maximum amount outstanding at any month end
during the period........................................ 98,415 69,265 62,665
Balance outstanding at end of period........................ 94,350 69,265 60,565
Weighted average interest rate during the period............ 6.34% 6.52% 6.64%
Weighted average interest rate at end of period............. 6.02% 6.33% 6.49%
19
Subsidiary Activities
Brookline Securities Corp. ("BSC") is a wholly-owned subsidiary of the
Company and BBS Investment Corporation ("BBS") is a wholly-owned subsidiary of
the Bank. These companies were established as Massachusetts security
corporations for the purpose of buying, selling and holding investment
securities on their own behalf and not as a broker. The income earned on their
investment securities is subject to a significantly lower rate of state tax than
that assessed on income earned on investment securities maintained at the
Company and the Bank. At December 31, 1998, BSC and BBS had total assets of
$56.8 million and $100.7 million, respectively, $55.9 million and $98.9 million,
respectively, of which were in investment securities and short-term investments.
160 Associates, Inc. ("Associates") is a wholly-owned subsidiary of
the Bank established as a Massachusetts corporation primarily for the purpose of
acquiring and holding stock in a subsidiary engaged in business that qualifies
as a real estate investment trust. The amount of capital Associates invested in
such activity amounted to $265.9 million at December 31, 1998.
Brookline Preferred Capital Corporation ("BPCC") was established in
January 1997 as a Massachusetts corporation to engage in real estate business
activities (including the acquisition and holding of securities and mortgage
loans) that enable it to be taxed as a real estate investment trust for federal
and Massachusetts tax purposes. At December 31, 1998, BPCC had total assets of
$267.2 million, $246.0 million of which were mortgage loans originated by and
acquired from the Bank. BPCC is a 99.9% owned subsidiary of Associates.
Personnel
As of December 31, 1998, the Company had 89 full-time employees and 11
part-time employees. The employees are not represented by a collective
bargaining unit and the Company considers its relationship with its employees to
be good.
Item 2. Properties
The branch located in the Company's main office is owned by the
Company. The other four branches of the Company, its loan production office in
Worcester and its operations center in Brookline are leased from unrelated third
parties. The operations center is used primarily to house operations and support
services. At December 31, 1998, the net book value of premises and leasehold
improvements was $621,000. Refer to Note 13 of the Notes to Consolidated
Financial Statements on page 43 of the Annual Report for information regarding
the Company's lease commitments at December 31, 1998.
Item 3. Legal Proceedings
The Company is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business
which, in the aggregate, involve amounts which are believed by management to be
immaterial to the financial condition and results of operations of the Company.
Item 4. Submission Of Matters To A Vote Of Security Holders
None
20
PART II
Item 5. Market For The Registrant's Common Stock And Related Security Holder
Matters
The common stock of the Company is traded on the Nasdaq National
Market System. The approximate number of holders of common stock as of December
31, 1998 as well as a table setting forth cash dividends paid on common stock
and the high and low closing prices of the common stock for each of the quarters
in the year ended December 31, 1998 appears on Page 51 of the Company's 1998
Annual Report which is incorporated herein by reference.
Item 6. Selected Consolidated Financial Data
Selected Consolidated Financial Data of the Company appears on pages 1
and 2 of the Company's 1998 Annual Report which is incorporated herein by
reference.
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations appears on pages 6 through 19 of the Company's 1998 Annual
Report which is incorporated herein by reference.
Item 7a. Quantitative And Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk appears on
pages 12 through 14 of the Company's 1998 Annual Report which is incorporated
herein by reference.
Item 8. Financial Statements And Supplementary Data
The following financial statements and supplementary data appear on
the pages indicated of the Company's 1998 Annual Report which is incorporated
herein by reference:
Pages
-----
Report of Independent Certified Public Accountants 20
Consolidated Balance Sheets as of December 31, 1998 and 1997 21
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996 22
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1998, 1997 and 1996 23
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 24
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 25-26
Notes to Consolidated Financial Statements 27-49
Item 9. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosures
None.
21
PART III
Item 10. Directors And Executive Officers Of The Registrant
A listing of and information about the Company's Directors and
Executive Officers appears on pages 4 and 5 of the Company's proxy statement
dated March 15, 1999 which is incorporated herein by reference.
Item 11. Executive Compensation
Executive Compensation is presented on page 9 of the Company's proxy
statement dated March 15, 1999 which is incorporated herein by reference.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
Security Ownership of Certain Beneficial Owners and Management is
presented on pages 2 and 3 of the Company's proxy statement dated March 15, 1999
which is incorporated herein by reference.
Item 13. Certain Relationships And Related Transactions
Certain Relationships and Related Transactions are presented on page
14 of the Company's proxy statement dated March 15, 1999 which is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K
(a) Documents
(1) Financial Statements: All financial statements are included
in Item 8 of Part II of this Report.
(2) Financial Statement Schedules: All financial statement
schedules have been omitted because they are not required,
not applicable or are included in the consolidated
financial statements or related notes.
(3) Exhibits
EXHIBIT INDEX
Exhibit Description
- - ------ -----------
3.1 Articles of Organization of the Company. (Exhibit 3.1 to
Registration Statement (No. 333-69245) on Form S-1 filed on
November 18, 1997)**
3.2 Bylaws of the Company (Exhibit 3.2 to Form S-1 filed on November
18, 1997)**
4 Form of Common Stock Certificate of the Company (Exhibit 4 to Form
S-1 filed on November 18, 1997)**
10.1 Form of Employment Agreement (Exhibit 10.1 to Form S-1 filed on
November 18, 1997)**
10.2 Form of Severance Agreement (Exhibit 10.2 to Form S-1 filed on
November 18, 1997)**
22
10.3 Supplemental Retirement Income Agreement with Richard P. Chapman,
Jr. (Exhibit 10.3 to Form S-1 filed on November 18, 1997)**
10.4 Supplemental Retirement Income Agreement with Susan M. Ginns
(Exhibit 10.4 to Form S-1 filed on November 18, 1997)**
10.5 Supplemental Retirement Income Agreement with Charles H. Peck
(Exhibit 10.5 to Form S-1 filed on November 18, 1997)**
10.6 Amended Employee Stock Ownership Plan
11 Statement Regarding Computation of Per Share Earnings - Earnings
per share is not presented for the period from March 24, 1998 (the
date of Conversion to a stock company) through December 31, 1998
as the earnings per share calculation for that period is not
meaningful.
12 Statement Regarding Computation of Ratios - Such computation can
be clearly determined from the material contained in this Report.
13 1998 Annual Report to Stockholders
21 Subsidiaries of the Registrant - This information is presented in
Item 1. Business - Subsidiary Activities of this Report.
22 Published Report Regarding Matters Submitted to Vote of Security
Holders - the Company's 1999 Stock Option Plan and 1999
Recognition and Retention Plan included in the Company's Proxy
Statement dated March 15, 1999, and incorporated herein by
reference)
27 EDGAR Financial Data Schedule
- - -----------
** Filed as part of a previous Commission filing and incorporated
herein by reference.
(b) Reports on Form 8-K - No reports on Form 8-K were filed by the
Company during the quarter ended December 31, 1998.
Signatures
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized
BROOKLINE BANCORP, INC.
Date: March 24, 1999 By: /s/ Richard P. Chapman, Jr
---------------------------------------
Richard P. Chapman, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Richard P. Chapman, Jr. By: /s/ Paul R. Bechet
------------------------------------------- ----------------------------------------------
Richard P. Chapman, Jr., President, Chief Paul R. Bechet, Senior Vice President and
Executive Officer and Director Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 24, 1999 Date: March 24, 1999
By: /s/ Oliver F. Ames By: /s/ Hollis W. Plimpton
------------------------------------------- ----------------------------------------------
Oliver F. Ames, Director Hollis W. Plimpton, Director
By: /s/ Dennis S. Aronowitz By:
------------------------------------------- ----------------------------------------------
Dennis S. Aronowitz, Director Edward D. Rowley, Director
By: /s/ George C. Caner, Jr. By: /s/ Joseph J. Slotnik
------------------------------------------- ----------------------------------------------
George C. Caner, Jr., Director Joseph J. Slotnik, Director
By: /s/ David C. Chapin By: /s/ William V. Tripp, III
------------------------------------------- ----------------------------------------------
David C. Chapin, Director William V. Tripp, III, Director
By: /s/ William G. Coughlin By: /s/ Rosamond B. Vaule
------------------------------------------- ----------------------------------------------
William G. Coughlin, Director Rosamond B. Vaule, Director
By: /s/ John L. Hall, II By: /s/ Peter O. Wilde
------------------------------------------- ----------------------------------------------
John L. Hall, II, Director Peter O. Wilde, Director
By: /s/ Charles H. Peck By: /s/ Franklin Wyman, Jr.
------------------------------------------- ----------------------------------------------
Charles H. Peck, Director Franklin Wyman, Jr., Director
24
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report. Prior to March 24, 1998, the Company had no
significant assets, liabilities or operations, and accordingly, the data prior
to such time represents the financial condition and results of operations of the
Bank.
At December 31,
1998 1997 1996 1995 1994
---------- ----------- ----------- ---------- ----------
(In thousands)
Selected Financial Condition Data:
Total assets............................................ $ 879,027 $ 701,119 $ 666,988 $ 632,788 $ 607,737
Loans, excluding money market loan participations....... 548,558 472,412 427,733 405,531 385,636
Money market loan participations........................ 44,300 24,000 52,950 43,100 36,400
Allowance for loan losses............................... 13,094 12,463 12,326 12,326 12,274
Debt securities:
Available for sale.................................... 102,934 89,620 97,007 62,691 31,585
Held to maturity...................................... 121,390 65,444 41,620 89,342 125,126
Marketable equity securities............................ 30,595 28,017 20,365 19,074 13,301
Deposits................................................ 489,370 482,304 484,016 474,215 471,811
Borrowed funds.......................................... 94,350 69,265 60,565 49,665 43,265
Sto