SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

 

For the transition period from          to          

 

Commission file number:  0-23695

 

 

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.   ý

 

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 17, 2003 was 56,924,272 for an aggregate market value of $727,492,196. This excludes 865,364 shares held by Brookline Bank Employee Stock Ownership Plan and Trust.

 

At March 17, 2003, the number of shares of common stock, par value $0.01 per share, issued and outstanding were 58,924,935 and 57,789,636, respectively.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

1.  Sections of the Annual Report to Stockholders for the year ended December 31, 2002 (Part II and Part III)

2.  Proxy Statement for the Annual Meeting of Stockholders dated March 14, 2003 (Part I and Part III)

 

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

FORM 10-K

 

Index

 

Part I
Item 1.	Business
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission Of Matters To A Vote Of Security Holders
Part II
Item 5.	Market For The Registrant’s Common Stock And Related Stockholder Matters
Item 6.	Selected Consolidated Financial Data
Item 7.	Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Item 7a.	Quantitative And Qualitative Disclosures About Market Risk
Item 8.	Financial Statements And Supplementary Data
Item 9.	Changes In And Disagreements With Accountants On Accounting And Financial Disclosures
Part III
Item 10.	Directors And Executive Officers Of The Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership Of Certain Beneficial Owners And Management and Related Stockholder Matters
Item 13.	Certain Relationships And Related Transactions
Item 14.	Controls and Procedures
Part IV
Item 15.	Exhibits, Financial Statement Schedules And Reports On Form 8-K
Signatures
Certifications

 

 

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 “believe”, “expect”, “anticipate”, “should”, “planned”, “estimated” and “potential”. 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 these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory and technological factors affecting the Company’s operations, pricing, products and services.

 

PART I

 

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.

 

For more information about the Company’s corporate structure and stock offering, see pages 1 and 2 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2002 Annual Report to Stockholders which is incorporated herein by reference.

 

Market Area and Credit Risk Concentration

 

Brookline operates five full-service banking offices in the Town of Brookline, an urban/suburban community adjacent to the City of Boston, and a full service banking office in the city of Newton, a community adjacent to the Town of Brookline. A new office is scheduled to be opened in the spring of 2003 in West Roxbury, another community adjacent to the town of Brookline.

 

Brookline’s deposits are gathered from the general public primarily in the Town of Brookline 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.

 

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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.

 

As described more fully on page 2 of the Management’ Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2002 Annual Report to Stockholders which is incorporated herein by reference, the Company has entered the indirect automobile finance business in the first quarter of 2003. Currently, the automobile industry is less robust than it has been for the past few years and uncertainties exist regarding the ability of consumers to maintain and service their debt levels. The success of this business initiative will depend 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 contemplated loan portfolio is not expected to be classified as “subprime lending”. Most of the Company’s loans are expected to be originated through auto 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. 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, the Massachusetts economy has been strong and 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 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 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.

 

Recent Development – Stock Repurchase Program

 

On March 6, 2003, the Company received non-objection from the Office of Thrift Supervision (“OTS”) to the Company’s repurchase of up to 5% or 2,937,532 shares of its common stock. The regulatory non-objection was necessary because the repurchase program will commence less than one year from the date of the Company’s reorganization and stock offering, which closed on July 8, 2002.

 

Management of the Company will use its discretion in determining the timing of the repurchases and the price at which repurchases will be made. The extent to which shares are repurchased will depend on a number of factors, including market trends and prices, economic conditions and the strength of the Company’s capital in relation to its activities.

 

Investment Securities

 

The investment policy of the Company is reviewed and approved by the Board of Directors on an annual basis. The current

 

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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, 2002, $653,000 of debt securities were rated “BBB” or lower, an amount equal to 0.1% of core capital.

 

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 $15.0 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 $75.0 million. The latter limit is allowed provided the aggregate value of investments rated less than “AA” does not exceed $50.0 million. At December 31, 2002, the aggregate carrying value of the largest holding of debt securities issued by one company was $2.1 million and the largest amount of debt securities issued by companies within the same industry was $4.3 million.

 

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 a loss 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

 

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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. Management believes investment in CMOs can provide attractive alternatives to other investments due to the variety of maturity, repayment and interest rate options available.

 

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 3.0% 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 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 3.0% of core capital. At December 31, 2002, aggregate unamortized premiums on all mortgage related securities in the portfolio amounted to $6.9 million, or 1.1% of core capital.

 

During the past three years, the Company has expanded its acquisition of CMOs because of their low credit risk and the attractiveness of their yields in relation to other high quality alternative investments with similar expected maturities. During much of that time, interest rates have been declining. Because of that trend and uncertainty about the future direction of interest rates, the Company has generally adhered to purchasing investments with maturities in the two to three year range with reasonably predictable cash flows. Investments in CMOs increased from 20.2% of the total investment portfolio at the beginning of 2000 to 71.4% at the end of 2002.

 

At December 31, 2002, the Company held $5.0 million of auction rate preferred stocks and $8.8 million of marketable equity securities, including net unrealized gains of $3.8 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 carrying value of marketable equity securities to no more than 25% of the Company’s core capital. At December 31, 2002, the actual carrying value of such securities equalled 2.2% of core capital. 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.

 

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The following table sets forth the composition of the Company’s debt and equity securities portfolios at the dates indicated:

 

		At December 31,
		2002					2001					2000
		Amount			Percent of total		Amount			Percent of total		Amount			Percent of total
		(Dollars in thousands)
Debt securities:
U.S. Government and Agency obligations.		$	45,195		12.04	%	$	14,208		7.79	%	$	11,079		5.35	%
Corporate obligations		25,133			6.70		58,904			32.32		93,673			45.26
Collateralized mortgage obligations		267,846			71.36		79,701			43.73		68,526			33.11
Mortgage-backed securities		13,898			3.70		2,983			1.64		2,388			1.16
Total debt securities		352,072			93.80		155,796			85.48		175,666			84.88
Auction rate preferred stock		5,000			1.33		—			—		3,500			1.98
Other marketable equity securities		8,838			2.36		17,187			9.43		20,642			9.69
Restricted equity securities		9,423			2.51		9,281			5.09		7,145			3.45
Total investment securities		$	375,333		100.00	%	$	182,264		100.00	%	$	206,953		100.00	%
Debt and equity securities available for sale