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EX-31.2 - EXHIBIT 31.2 - BROOKLINE BANCORP INCbrkl-ex312_2016331xq1.htm
EX-32.2 - EXHIBIT 32.2 - BROOKLINE BANCORP INCbrkl-ex322_2016331xq1.htm
EX-32.1 - EXHIBIT 32.1 - BROOKLINE BANCORP INCbrkl-ex321_2016331xq1.htm
EX-31.1 - EXHIBIT 31.1 - BROOKLINE BANCORP INCbrkl-ex311_2016331xq1.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2016
 
Commission file number 0-23695
 
Brookline Bancorp, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
04-3402944
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
131 Clarendon Street, Boston, MA
 
02116
(Address of principal executive offices)
 
(Zip Code)
 
(617) 425-4600
(Registrant’s telephone number, including area code)
 
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 requirements for the past 90 days.  YES  x  NO  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  x  NO  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
Large accelerated filer x    Accelerated filer o    Non-accelerated filer o Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES  o  NO  x
 
At May 9, 2016, the number of shares of common stock, par value $0.01 per share, outstanding was 70,398,186.
 




BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
 
Index 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I — FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets
 
At March 31, 2016
 
At December 31, 2015
ASSETS
(In Thousands Except Share Data)
Cash and due from banks
$
31,127

 
$
28,753

Short-term investments
42,795

 
46,736

Total cash and cash equivalents
73,922

 
75,489

Investment securities available-for-sale
536,182

 
513,201

Investment securities held-to-maturity (fair value of $84,290 and $93,695)
83,409

 
93,757

Total investment securities
619,591

 
606,958

Loans and leases held-for-sale
3,190

 
13,383

Loans and leases:
 

 
 

Commercial real estate loans
2,766,398

 
2,664,394

Commercial loans and leases
1,398,639

 
1,374,296

Indirect automobile loans
11,220

 
13,678

Consumer loans
954,188

 
943,172

Total loans and leases
5,130,445

 
4,995,540

Allowance for loan and lease losses
(58,606
)
 
(56,739
)
Net loans and leases
5,071,839

 
4,938,801

Restricted equity securities
65,438

 
66,117

Premises and equipment, net of accumulated depreciation of $53,505 and $51,722, respectively
77,128

 
78,156

Deferred tax asset
24,181

 
26,817

Goodwill
137,890

 
137,890

Identified intangible assets, net of accumulated amortization of $29,784 and $29,149, respectively
9,998

 
10,633

Other real estate owned ("OREO") and repossessed assets, net
565

 
1,343

Other assets
97,288

 
86,751

Total assets
$
6,181,030

 
$
6,042,338

LIABILITIES AND EQUITY
 

 
 

Deposits:
 

 
 

Non-interest-bearing deposits:
 

 
 

Demand checking accounts
$
793,195

 
$
799,117

Interest-bearing deposits:
 

 
 

NOW accounts
286,920

 
283,972

Savings accounts
555,843

 
540,788

Money market accounts
1,649,348

 
1,594,269

Certificate of deposit accounts
1,108,150

 
1,087,872

Total interest-bearing deposits
3,600,261

 
3,506,901

Total deposits
4,393,456

 
4,306,018

Borrowed funds:
 

 
 

Advances from the Federal Home Loan Bank of Boston ("FHLBB")
905,953

 
861,866

Subordinated debentures and notes
82,978

 
82,936

Other borrowed funds
39,378

 
38,227

Total borrowed funds
1,028,309

 
983,029

Mortgagors’ escrow accounts
7,905

 
7,516

Accrued expenses and other liabilities
64,566

 
72,289

Total liabilities
5,494,236

 
5,368,852

 
 
 
 
Commitments and contingencies (Note 12)


 


 
 
 
 
Stockholders' Equity:
 

 
 

Brookline Bancorp, Inc. stockholders’ equity:
 

 
 

Common stock, $0.01 par value; 200,000,000 shares authorized; 75,744,445 shares issued
757

 
757

Additional paid-in capital
617,477

 
616,899

Retained earnings, partially restricted
116,151

 
109,675

Accumulated other comprehensive income/(loss)
3,352

 
(2,476
)
Treasury stock, at cost; 4,861,554 shares and 4,861,554 shares, respectively
(56,208
)
 
(56,208
)
Unallocated common stock held by the Employee Stock Ownership Plan ("ESOP"); 203,973 shares and 213,066 shares, respectively
(1,112
)
 
(1,162
)
Total Brookline Bancorp, Inc. stockholders’ equity
680,417

 
667,485

Noncontrolling interest in subsidiary
6,377

 
6,001

Total stockholders' equity
686,794

 
673,486

Total liabilities and stockholders' equity
$
6,181,030

 
$
6,042,338

 
 
 
 

See accompanying notes to the unaudited consolidated financial statements.

1


BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Income
 
Three Months Ended March 31,
 
2016
 
2015
 
(In Thousands Except Share Data)
Interest and dividend income:
 

 
 

Loans and leases
$
54,247

 
$
53,381

Debt securities
2,932

 
2,683

Marketable and restricted equity securities
680

 
524

Short-term investments
39

 
21

Total interest and dividend income
57,898

 
56,609

 
 
 
 
Interest expense:
 

 
 

Deposits
4,745

 
4,304

Borrowed funds
3,950

 
3,777

Total interest expense
8,695

 
8,081

 
 
 
 
Net interest income
49,203

 
48,528

Provision for credit losses
2,378

 
2,263

Net interest income after provision for credit losses
46,825

 
46,265

 
 
 
 
Non-interest income:
 

 
 

Deposit fees
2,145

 
2,066

Loan fees
330

 
342

Loan level derivative income, net

1,629

 

Gain on sales of loans and leases held-for-sale
905

 
869

Other
1,460

 
1,193

Total non-interest income
6,469

 
4,470

 
 
 
 
Non-interest expense:
 

 
 

Compensation and employee benefits
18,727

 
17,524

Occupancy
3,526

 
3,472

Equipment and data processing
3,714

 
4,020

Professional services
966

 
1,094

FDIC insurance
878

 
867

Advertising and marketing
861

 
748

Amortization of identified intangible assets
635

 
738

Other
2,746

 
2,863

Total non-interest expense
32,053

 
31,326

 
 
 
 
Income before provision for income taxes
21,241

 
19,409

Provision for income taxes
7,599

 
7,104

Net income before noncontrolling interest in subsidiary
13,642

 
12,305

 
 
 
 
Less net income attributable to noncontrolling interest in subsidiary
830

 
602

Net income attributable to Brookline Bancorp, Inc.
$
12,812


$
11,703

 
 
 
 
Earnings per common share:
 

 
 

Basic
$
0.18

 
$
0.17

Diluted
0.18

 
0.17

 
 
 
 
Weighted average common shares outstanding during the period:
 

 
 

Basic
70,186,921

 
70,036,090

Diluted
70,343,408

 
70,164,105

 
 
 
 
Dividends declared per common share
$
0.090

 
$
0.085

 
 
 
 
 
See accompanying notes to the unaudited consolidated financial statements.

2


BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Comprehensive Income
 
 
Three Months Ended March 31,
 
2016
 
2015
 
(In Thousands)
Net income before noncontrolling interest in subsidiary
$
13,642

 
$
12,305

 
 
 
 
Other comprehensive income, net of taxes:
 

 
 

 
 
 
 
Investment securities available-for-sale:
 

 
 

Unrealized securities holding gains
9,074

 
5,371

Income tax expense
(3,246
)
 
(2,002
)
Net unrealized securities holding gains
5,828

 
3,369

 
 
 
 
Postretirement benefits:
 

 
 

Adjustment of accumulated obligation for postretirement benefits

 

Income tax expense

 

Net adjustment of accumulated obligation for postretirement benefits

 

 
 
 
 
Other comprehensive income, net of taxes
5,828

 
3,369

 
 
 
 
Comprehensive income
19,470

 
15,674

Net income attributable to noncontrolling interest in subsidiary
830

 
602

Comprehensive income attributable to Brookline Bancorp, Inc.
$
18,640

 
$
15,072

 
 
 
 
 
See accompanying notes to the unaudited consolidated financial statements.

3


BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Changes in Equity
Three Months Ended March 31, 2016 and 2015
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Treasury
Stock
 
Unallocated
Common Stock
Held by ESOP
 
Total Brookline
Bancorp, Inc.
Stockholders’
Equity
 
Noncontrolling
Interest in
Subsidiary
 
Total
Equity
 
(In Thousands Except Share Data)
Balance at December 31, 2015
$
757

 
$
616,899

 
$
109,675

 
$
(2,476
)
 
$
(56,208
)
 
$
(1,162
)
 
$
667,485

 
$
6,001

 
$
673,486

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Brookline Bancorp, Inc.

 

 
12,812

 

 

 

 
12,812

 

 
12,812

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interest in subsidiary

 


 

 

 

 

 

 
830

 
830

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of noncontrolling units

 

 

 

 

 

 

 
76

 
76

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income

 

 

 
5,828

 

 

 
5,828

 

 
5,828

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock dividends of $0.09 per share

 

 
(6,336
)
 

 

 

 
(6,336
)
 

 
(6,336
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend to owners of noncontrolling interest in subsidiary

 

 

 

 

 

 

 
(530
)
 
(530
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation under recognition and retention plans

 
529

 

 

 

 

 
529

 

 
529

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock held by ESOP committed to be released (9,093 shares)

 
49

 

 


 

 
50

 
99

 

 
99

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2016
$
757

 
$
617,477

 
$
116,151

 
$
3,352

 
$
(56,208
)
 
$
(1,112
)
 
$
680,417

 
$
6,377

 
$
686,794

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


4


BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Changes in Equity (Continued)
Three Months Ended March 31, 2016 and 2015
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings*
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Treasury
Stock
 
Unallocated
Common Stock
Held by ESOP
 
Total Brookline
Bancorp, Inc.
Stockholders’
Equity*
 
Noncontrolling
Interest in
Subsidiary
 
Total
Equity*
 
(In Thousands Except Share Data)
Balance at December 31, 2014
$
757

 
$
617,475

 
$
84,860

 
$
(1,622
)
 
$
(58,282
)
 
$
(1,370
)
 
$
641,818

 
$
4,787

 
$
646,605

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Brookline Bancorp, Inc.

 

 
11,703

 

 

 

 
11,703

 

 
11,703

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interest in subsidiary

 

 

 

 

 

 

 
602

 
602

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of noncontrolling units

 

 

 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income

 

 

 
3,369

 

 

 
3,369

 

 
3,369

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock dividends of $0.085 per share

 

 
(5,974
)
 

 

 

 
(5,974
)
 

 
(5,974
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend to owners of noncontrolling interest in subsidiary

 

 

 

 

 

 

 
(742
)
 
(742
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation under recognition and retention plans

 
329

 

 

 
(19
)
 

 
310

 

 
310

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock held by ESOP committed to be released (9,579 shares)

 
41

 

 

 

 
52

 
93

 

 
93

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2015
$
757

 
$
617,845

 
$
90,589

 
$
1,747

 
$
(58,301
)
 
$
(1,318
)
 
$
651,319

 
$
4,647

 
$
655,966

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(*) Previously reported amounts prior to January 1, 2015 have been restated to reflect a retrospective change in accounting principle for investments in qualified affordable housing projects, in accordance with ASU 2014-01. Refer to Note 8, "Investments in Qualified Affordable Projects".
 
See accompanying notes to the unaudited consolidated financial statements.

5


BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows

 
Three Months Ended March 31,
 
2016
 
2015
 
(In Thousands)
Cash flows from operating activities:
 

 
 

Net income attributable to Brookline Bancorp, Inc.
$
12,812

 
$
11,703

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
Net income attributable to noncontrolling interest in subsidiary
830

 
602

Provision for credit losses
2,378

 
2,263

Origination of loans and leases held-for-sale
(11,949
)
 
(5,185
)
Proceeds from loans and leases held-for-sale, net (1)
12,323

 
6,283

Deferred income tax expense
(611
)
 
(149
)
Depreciation of premises and equipment
1,783

 
1,792

Amortization of investment securities premiums and discounts, net
500

 
509

Amortization of deferred loan and lease origination costs, net
1,453

 
1,860

Amortization of identified intangible assets
635

 
738

Amortization of debt issuance costs
25

 
25

Accretion of acquisition fair value adjustments, net
(789
)
 
(1,875
)
Gain on sales of loans and leases held-for-sale
(905
)
 
(869
)
Loss on sales of OREO and repossessed assets, net
(7
)
 

Write-down of OREO and repossessed assets
45

 
38

Compensation under recognition and retention plans
570

 
366

ESOP shares committed to be released
99

 
93

Net change in:
 

 
 

Cash surrender value of bank-owned life insurance
(259
)
 
(263
)
Other assets
(10,278
)
 
1,216

Accrued expenses and other liabilities
(8,332
)
 
(10,525
)
Net cash provided from operating activities (1)
323

 
8,622

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from maturities, calls and principal repayments of investment securities available-for-sale
27,639

 
19,974

Purchases of investment securities available-for-sale
(41,985
)
 
(29,466
)
Proceeds from maturities, calls, and principal repayments of investment securities held-to-maturity
13,784

 

Purchases of investment securities held-to-maturity
(3,496
)
 

Proceeds from redemption of restricted equity securities
679

 

Proceeds from sales of loans and leases held-for-investment, net (1)
23,116

 
267,164

Net increase in loans and leases (1)
(149,323
)
 
(83,176
)
Proceeds from sales of OREO and repossessed assets (1)
1,547

 
2,647

Purchase of premises and equipment, net
(796
)
 
(466
)
Net cash (used for) provided from investing activities (1)
(128,835
)
 
176,677

 
 
 
(Continued)


6


BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows (Continued)

 
Three Months Ended March 31,
 
2016
 
2015
 
(In Thousands)
Cash flows from financing activities:
 

 
 

Increase in demand checking, NOW, savings and money market accounts
67,160

 
51,817

Increase in certificates of deposit
20,302

 
104,915

Proceeds from FHLBB advances
2,244,237

 
1,587,500

Repayment of FHLBB advances
(2,199,504
)
 
(1,784,343
)
Increase/(decrease) in other borrowed funds, net
1,151

 
(3,987
)
Increase/(decrease) in mortgagors’ escrow accounts, net
389

 
(87
)
Payment of dividends on common stock
(6,336
)
 
(5,974
)
Proceeds from issuance of noncontrolling units
76

 

Payment of dividends to owners of noncontrolling interest in subsidiary
(530
)
 
(742
)
Net cash provided from (used for) financing activities
126,945

 
(50,901
)
 
 
 
 
Net (increase)/decrease in cash and cash equivalents
(1,567
)
 
134,398

Cash and cash equivalents at beginning of period
75,489

 
62,723

Cash and cash equivalents at end of period
$
73,922

 
$
197,121

 
 
 
 
Supplemental disclosures of cash flows information:
 

 
 

Cash paid during the period for:
 

 
 

Interest on deposits, borrowed funds and subordinated debt
$
10,447

 
$
9,996

Income taxes
8,286

 
3,216

Non-cash investing activities:
 

 
 

Transfer from loans and leases held-for-sale to loans and leases
$
10,000

 
$

Transfer from loans to other real estate owned
$
807

 
$
3,252

 
 
 
 
(1) Cash flows resulting from the sale of the indirect automobile portfolio and the OREO and repossessed assets which had been recorded as cash provided from operating activities has been revised to cash flows from investing activities in the first quarter of 2015 to properly reflect the cash flow activity. There is no impact to the Company's net income or related per share amounts for the three months ended March 31, 2015.

See accompanying notes to the unaudited consolidated financial statements.

7

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015


(1)     Basis of Presentation
 
Overview
 
Brookline Bancorp, Inc. (the “Company”) is a bank holding company (within the meaning of the Bank Holding Company Act of 1956, as amended) and the parent of Brookline Bank, a Massachusetts-chartered savings bank; Bank Rhode Island (“BankRI”), a Rhode Island-chartered financial institution; and First Ipswich Bank (“First Ipswich”), a Massachusetts-chartered trust company (collectively referred to as the “Banks”). The Banks are all members of the Federal Reserve System. The Company is also the parent of Brookline Securities Corp. The Company’s primary business is to provide commercial, business and retail banking services to its corporate, municipal, and individual customers through the Banks and its non-bank subsidiaries.
 
Brookline Bank, which includes its wholly-owned subsidiaries BBS Investment Corp., Longwood Securities Corp. and its 84.4%-owned subsidiary, Eastern Funding LLC ("Eastern Funding"), operates 25 full-service banking offices in the greater Boston metropolitan area. BankRI, which includes its wholly-owned subsidiaries, Acorn Insurance Agency, BRI Realty Corp., Macrolease Corporation ("Macrolease"), BRI Investment Corp. and its wholly-owned subsidiary, BRI MSC Corp., operates 19 full-service banking offices in the greater Providence area. First Ipswich, which includes its wholly-owned subsidiaries, First Ipswich Insurance Agency and First Ipswich Securities II Corp., operates five full-service banking offices on the north shore of eastern Massachusetts.

The Company’s activities include acceptance of commercial, municipal and retail deposits, origination of mortgage loans on commercial and residential real estate located principally in Massachusetts and Rhode Island, origination of commercial loans and leases to small and mid-sized businesses, investment in debt and equity securities, and the offering of cash management and investment advisory services. The Company also provides specialty equipment financing through its subsidiaries Eastern Funding, which is based in New York, New York, and Macrolease, which is based in Plainview, New York.
 
The Company and the Banks are supervised, examined and regulated by the Board of Governors of the Federal Reserve System ("FRB"). As a Massachusetts-chartered saving bank and trust company, Brookline Bank and First Ipswich, respectively, are also subject to regulation under the laws of the Commonwealth of Massachusetts and the jurisdiction of the Massachusetts Division of Banks. As a Rhode Island-chartered financial institution, BankRI is also subject to regulation under the laws of the State of Rhode Island and the jurisdiction of the Banking Division of the Rhode Island Department of Business Regulation.
 
The Federal Deposit Insurance Corporation (“FDIC”) offers insurance coverage on all deposits up to $250,000 per depositor at each of the three Banks. As FDIC-insured depository institutions, all three Banks are also secondarily subject to supervision, examination and regulation by the FDIC. Additionally, as a Massachusetts-chartered savings bank, Brookline Bank is insured by the Depositors Insurance Fund (“DIF”), a private industry-sponsored insurance company. The DIF insures savings bank deposits in excess of the FDIC insurance limits. As such, Brookline Bank offers 100% insurance on all deposits as a result of a combination of insurance from the FDIC and the DIF. Brookline Bank is required to file reports with the DIF.
 
Basis of Financial Statement Presentation
 
The unaudited consolidated financial statements of the Company presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles (“GAAP”). In the opinion of Management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying consolidated financial statements have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2015

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.


8

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

In preparing these consolidated financial statements, Management is required to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, income, expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates based upon changing conditions, including economic conditions and future events. Material estimates that are particularly susceptible to significant change in the near-term include the determination of the allowance for loan and lease losses, the determination of fair market values of assets and liabilities, including acquired loans and leases, the review of goodwill and intangibles for impairment and the review of deferred tax assets for valuation allowances.
 
The judgments used by Management in applying these critical accounting policies may be affected by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results. For example, subsequent evaluations of the loan and lease portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan and lease losses in future periods, and the inability to collect outstanding principal may result in increased loan and lease losses.
 
(2)         Recent Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU was issued as part of the FASB Simplification Initiative which intends to reduce the complexity of GAAP while improving usefulness to users. There are eight main items in this ASU that contribute to the simplification of share-based accounting. For public entities, this ASU is effective for the fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. Management is currently assessing the applicability of ASU 2016-09 and has not determined the impact of the deferral, if any, as of March 31, 2016.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU was issued to clarify how to recognize revenue depending on an entities position, in relation to another entity involved, on contracts with customers. The entity can either be a principal party or an agent, and must record revenue accordingly. This ASU is not yet effective. Since this ASU affects ASU 2014-09, and that effective date was deferred, this ASU remains suspended too. Management is currently assessing the applicability of ASU 2016-08 and has not determined the impact of the deferral, if any, as of March 31, 2016.

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. This ASU was issued as part of the FASB Simplification Initiative which intends to reduce the complexity of GAAP while improving usefulness to users. This ASU no longer requires that the equity method be retroactively implemented. Only when an investment qualifies for the equity method is it necessary to switch accounting methods, assuming equity method is not already in place. For public entities, this ASU is effective for the fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This ASU must be applied prospectively on the effective date. Early adoption is permitted. Management is currently assessing the applicability of ASU 2016-07 and has not determined the impact of the deferral, if any, as of March 31, 2016.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. This ASU was issued to identify a consistent approach on identifying whether or not call (put) options embedded in derivatives meet certain criteria which would then require that they be accounted for separately. GAAP has established rules in order to go about evaluating options within derivatives however questions arose. The Derivatives Implementation Group then created four steps to aid in this evaluation process. This ASU requires that this four step process be the only assessment process in place for this issue. For public entities, this ASU is effective for the fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This ASU must be applied prospectively on the effective date. Early adoption is permitted. Management is currently assessing the applicability of ASU 2016-06 and has not determined the impact of the deferral, if any, as of March 31, 2016.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-02, Leases. This ASU requires lessees to put most leases on their balance sheet but recognize expenses on their income statements in a manner similar to current accounting. This ASU also eliminates current real estate-specific provisions for all companies. For lessors, this ASU modifies the classification criteria and the accounting for sales-type and direct financing leases. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods therein. Early

9

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

adoption is permitted. The Company is currently assessing the applicability of this ASU and has not determined the impact, if any, as of March 31, 2016.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments. This ASU significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods therein. The Company is currently assessing the applicability of this ASU and has not determined the impact, if any, as of March 31, 2016.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This ASU was issued to defer the effective date of ASU 2014-09 for all entities by one year. In effect, public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods (including interim reporting periods within those period) beginning after December 15, 2017. The Company is currently assessing the applicability of this ASU and has not determined the impact, if any, as of March 31, 2016.

(3)     Investment Securities
 
The following tables set forth investment securities available-for-sale and held-to-maturity at the dates indicated:
 
 
At March 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In Thousands)
Investment securities available-for-sale:
 
 
 
 
 
 
 
Debt securities:
 

 
 

 
 

 
 

GSEs
$
56,108

 
$
1,151

 
$

 
$
57,259

GSE CMOs
189,529

 
700

 
1,049

 
189,180

GSE MBSs
240,138

 
3,282

 
206

 
243,214

SBA commercial loan asset-backed securities
134

 

 
1

 
133

Corporate debt obligations
43,173

 
1,065

 

 
44,238

Trust preferred securities
1,467

 

 
302

 
1,165

Total debt securities
530,549

 
6,198

 
1,558

 
535,189

Marketable equity securities
959

 
34

 

 
993

Total investment securities available-for-sale
$
531,508

 
$
6,232

 
$
1,558

 
$
536,182

Investment securities held-to-maturity:
 
 
 
 
 
 
 
GSEs
$
25,420

 
$
111

 
$

 
$
25,531

GSEs MBSs
18,539

 
17

 
48

 
18,508

Municipal obligations
38,950

 
817

 

 
39,767

Foreign government securities
500

 

 
16

 
484

Total investment securities held-to-maturity
$
83,409

 
$
945

 
$
64

 
$
84,290

 

10

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
At December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In Thousands)
Investment securities available-for-sale:
 
 
 
 
 
 
 
Debt securities:
 

 
 

 
 

 
 

GSEs
$
40,658

 
$
141

 
$
172

 
$
40,627

GSE CMOs
198,000

 
45

 
4,229

 
193,816

GSE MBSs
230,213

 
1,098

 
1,430

 
229,881

SBA commercial loan asset-backed securities
148

 

 
1

 
147

Corporate debt obligations
46,160

 
344

 
18

 
46,486

Trust preferred securities
1,466

 

 
199

 
1,267

Total debt securities
516,645

 
1,628

 
6,049

 
512,224

Marketable equity securities
956

 
21

 

 
977

Total investment securities available-for-sale
$
517,601

 
$
1,649

 
$
6,049

 
$
513,201

Investment securities held-to-maturity:
 
 
 
 
 
 
 
GSEs
$
34,915

 
$
9

 
$
105

 
$
34,819

GSEs MBSs
19,291

 

 
305

 
18,986

Municipal obligations
39,051

 
364

 
25

 
39,390

Foreign government securities
500

 

 

 
500

Total investment securities held-to-maturity
$
93,757

 
$
373

 
$
435

 
$
93,695


At March 31, 2016, the fair value of all investment securities available-for-sale was $536.2 million, with net unrealized gains of $4.7 million, compared to a fair value of $513.2 million and net unrealized losses of $4.4 million at December 31, 2015. At March 31, 2016, $122.0 million, or 22.8% of the portfolio, had gross unrealized losses of $1.6 million, compared to $368.1 million, or 71.7%, with gross unrealized losses of $6.0 million at December 31, 2015.

At March 31, 2016, the fair value of all investment securities held-to-maturity was $84.3 million, with net unrealized gains of $0.9 million, compared to a fair value of $93.7 million with net unrealized losses of $62.0 thousand at December 31, 2015. At March 31, 2016, $11.2 million, or 13.2% of the portfolio, had gross unrealized losses of $64.0 thousand, compared to $52.3 million, or 55.8% with gross unrealized losses of $0.4 million at December 31, 2015.

Investment Securities as Collateral
 
At March 31, 2016 and December 31, 2015, respectively, $462.6 million and $486.4 million of investment securities were pledged as collateral for repurchase agreements; municipal deposits; treasury, tax and loan deposits; swap agreements; and FHLBB borrowings.
 

11

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

Other-Than-Temporary Impairment (“OTTI”)
 
Investment securities at March 31, 2016 and December 31, 2015 that have been in a continuous unrealized loss position for less than twelve months or twelve months or longer are as follows:
 
 
At March 31, 2016
 
Less than Twelve Months
 
Twelve Months or Longer
 
Total
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
(In Thousands)
Investment securities available-for-sale:
 

 
 

 
 

 
 

 
 

 
 

GSEs
$

 
$

 
$

 
$

 
$

 
$

GSE CMOs
7,098

 
45

 
91,002

 
1,004

 
98,100

 
1,049

GSE MBSs

 

 
22,654

 
206

 
22,654

 
206

SBA commercial loan asset-backed securities

 

 
125

 
1

 
125

 
1

Corporate debt obligations

 

 

 

 

 

Trust preferred securities

 

 
1,165

 
302

 
1,165

 
302

Temporarily impaired debt securities available-for-sale
7,098


45


114,946


1,513


122,044


1,558

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
GSEs

 

 

 

 

 

GSEs MBSs
10,670

 
48

 

 

 
10,670

 
48

Municipal obligations

 

 

 

 

 

Foreign government securities
484

 
16

 

 

 
484

 
16

Temporarily impaired debt securities held-to-maturity
11,154

 
64

 

 

 
11,154


64

Total temporarily impaired investment securities
$
18,252

 
$
109

 
$
114,946

 
$
1,513

 
$
133,198

 
$
1,622

 

12

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
At December 31, 2015
 
Less than Twelve Months
 
Twelve Months or Longer
 
Total
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
(In Thousands)
Investment securities available-for-sale:
 

 
 

 
 

 
 

 
 

 
 

GSEs
$
19,633

 
$
172

 
$

 
$

 
$
19,633

 
$
172

GSE CMOs
89,680

 
1,294

 
100,473

 
2,935

 
190,153

 
4,229

GSE MBSs
133,779

 
845

 
16,968

 
585

 
150,747

 
1,430

Private-label CMOs

 

 

 

 

 

SBA commercial loan asset-backed securities

 

 
139

 
1

 
139

 
1

Auction-rate municipal obligations

 

 

 

 

 

Corporate debt obligations
6,181

 
18

 

 

 
6,181

 
18

Trust preferred securities

 

 
1,267

 
199

 
1,267

 
199

Temporarily impaired debt securities available-for-sale
$
249,273


$
2,329


$
118,847


$
3,720


$
368,120


$
6,049

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
GSEs
$
25,837

 
$
105

 
$

 
$

 
$
25,837

 
$
105

GSEs MBSs
18,834

 
305

 

 

 
18,834

 
305

Municipal obligations
7,629

 
25

 

 

 
7,629

 
25

Foreign government securities

 

 
$

 

 

 

Temporarily impaired debt securities held-to-maturity
$
52,300

 
$
435

 
$

 
$

 
$
52,300

 
$
435

Total temporarily impaired investment securities
$
301,573

 
$
2,764

 
$
118,847

 
$
3,720

 
$
420,420

 
$
6,484

 
The Company performs regular analysis on the investment securities portfolio to determine whether a decline in fair value indicates that an investment security is OTTI. In making these OTTI determinations, Management considers, among other factors, the length of time and extent to which the fair value has been less than amortized cost; projected future cash flows; credit subordination and the creditworthiness; capital adequacy; and near-term prospects of the issuers.

Management also considers the Company’s capital adequacy, interest-rate risk, liquidity and business plans in assessing whether it is more likely than not that the Company will sell or be required to sell the investment securities before recovery. If the Company determines that a decline in fair value is OTTI and that it is more likely than not that the Company will not sell or be required to sell the investment security before recovery of its amortized cost, the credit portion of the impairment loss is recognized in the Company's unaudited consolidated statements of income and the noncredit portion is recognized in accumulated other comprehensive income. The credit portion of the OTTI impairment represents the difference between the amortized cost and the present value of the expected future cash flows of the investment security. If the Company determines that a decline in fair value is OTTI and it is more likely than not that it will sell or be required to sell the investment security before recovery of its amortized cost, the entire difference between the amortized cost and the fair value of the investment security will be recognized in the Company's unaudited consolidated statements of income.

Investment Securities Available-For-Sale Impairment Analysis

The following discussion summarizes, by investment security type, the basis for evaluating if the applicable investment securities within the Company’s available-for-sale portfolio were OTTI at March 31, 2016. Based on the analysis below, it is more likely than not that the Company will not sell or be required to sell the investment securities before recovery of its amortized cost. The Company's ability and intent to hold these investment securities until recovery is supported by the Company's strong capital and liquidity positions as well as its historically low portfolio turnover. As such, Management has determined that the investment securities are not OTTI at March 31, 2016. If market conditions for investment securities

13

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

worsen or the creditworthiness of the underlying issuers deteriorates, it is possible that the Company may recognize additional OTTI in future periods.

 U.S. Government-Sponsored Enterprises
 
The Company invests in securities issued by U.S. Government-sponsored enterprises (“GSEs”), including GSE debt securities, mortgage-backed securities (“MBSs”), and collateralized mortgage obligations (“CMOs”). GSE securities include obligations issued by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), the Government National Mortgage Association (“GNMA”), the Federal Home Loan Banks ("FHLB"), and the Federal Farm Credit Bank. At March 31, 2016, only GNMA MBSs and CMOs, and Small Business Administration (“SBA”) commercial loan asset-backed securities with an estimated fair value of $24.0 million were backed explicitly by the full faith and credit of the U.S. Government, compared to $21.8 million at December 31, 2015.
 
At March 31, 2016, the Company held GSE debentures with a total fair value of $57.3 million with a net unrealized gain of $1.2 million. At December 31, 2015, the Company held GSE debentures with a total fair value of $40.6 million, which approximated amortized cost. At March 31, 2016, none of the eighteen securities in this portfolio were in an unrealized loss position. At December 31, 2015, seven of the thirteen securities in this portfolio were in unrealized loss positions. All securities are performing and backed by the implicit (FHLB / FNMA / FHLMC) or explicit (GNMA / SBA) guarantee of the U.S. Government. During the three months ended March 31, 2016, the Company purchased $21.5 million of GSE debentures. There were no purchases of GSE debentures during the same period in 2015.

At March 31, 2016, the Company held GSE mortgage-related securities with a total fair value of $432.4 million with a net unrealized gain of $2.7 million. This compares to a total fair value of $423.7 million with a net unrealized loss of $4.5 million at December 31, 2015. At March 31, 2016, 38 of the 254 securities in this portfolio were in unrealized loss positions, compared to 101 of the 249 securities at December 31, 2015. All securities are performing and backed by the implicit (FHLB / FNMA / FHLMC) or explicit (GNMA) guarantee of the U.S. Government. During the three months ended March 31, 2016, the Company purchased $20.5 million in GSE CMOs and GSE MBSs. This compares to a total of $29.5 million purchased during the same period in 2015.

SBA Commercial Loan Asset-Backed Securities

At March 31, 2016, the Company held six SBA securities with a total fair value of $0.1 million which approximated cost as compared to December 31, 2015, where the Company held seven SBA securities with a total fair value of $0.1 million , which approximated amortized cost. At March 31, 2016, five of the six securities in this portfolio were in unrealized loss positions and at December 31, 2015, six of the seven securities in this portfolio were in unrealized loss positions. All securities are performing and are backed by the explicit (SBA) guarantee of the U.S. Government.

Corporate Obligations
 
From time to time, the Company may invest in high-quality corporate obligations to provide portfolio diversification and improve the overall yield on the portfolio. At March 31, 2016, the Company held fifteen corporate obligation securities with a total fair value of $44.2 million and a net unrealized gain of $1.1 million as compared to fifteen corporate obligation securities with a total fair value of $46.5 million and a net unrealized gain of $0.3 million at December 31, 2015. At March 31, 2016, none of the fifteen securities in this portfolio was in an unrealized loss position. At December 31, 2015, two of the fifteen securities in this portfolio were in an unrealized loss position. Full collection of the obligations is expected because the financial condition of the issuer is sound, and the issuer has not defaulted on scheduled payments, the obligations are rated investment grade, and the Company has the ability and intent to hold the obligations for a period of time to recover the amortized cost. During the three months ended March 31, 2016 and 2015, the Company did not purchase any corporate obligations.

Trust Preferred Securities
 
Trust preferred securities represent subordinated debt issued by financial institutions. At March 31, 2016, the Company owned two trust preferred securities with a total fair value of $1.2 million and a net unrealized loss of $0.3 million. This compares to two trust preferred securities with a total fair value of $1.3 million and a net unrealized loss of $0.2 million at December 31, 2015. At March 31, 2016 and December 31, 2015, both of the securities in this portfolio were in unrealized loss

14

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

positions. Full collection of the obligations is expected because the financial condition of the issuers is sound, neither of the issuers have defaulted on scheduled payments, the obligations are rated investment grade, and the Company has the ability and intent to hold the obligations for a period of time to recover the amortized cost.

Marketable Equity Securities

At March 31, 2016 and December 31, 2015, the Company owned two marketable equity securities with a fair value of $1.0 million, which approximated amortized cost. At March 31, 2016 and December 31, 2015, neither of the securities in this portfolio was in an unrealized loss position.

Investment Securities Held-to-Maturity Impairment Analysis

As of March 31, 2016, the Company owned 93 held-to-maturity investment securities with a total fair value of $84.3 million and a net unrealized gain of $0.9 million. This compares to a fair value of $93.7 million at December 31, 2015. As of March 31, 2016, five of the securities were in an unrealized loss position compared to none of the securities in an unrealized loss position at December 31, 2015. Management does not intend to sell these securities prior to maturity. As such, Management has determined that the investment securities are not OTTI at March 31, 2016. During the three months ended March 31, 2016, the Company purchased $3.5 million of held-to-maturity investment securities. The Company did not purchase any held-to-maturity investment securities during the same period in 2015.

U.S. Government-Sponsored Enterprises
The Company invests in securities issued by GSEs including GSE debt securities, MBSs, and CMOs. GSE securities include obligations issued by FNMA, FHLMC, GNMA, FHLB, and the Federal Farm Credit Bank. As of March 31, 2016, the Company owned GSE debentures and GSE MBS with a total fair value of $25.5 million and $18.5 million, respectively.
As of March 31, 2016, the Company owned GSE mortgage-related securities with a total amortized cost of $18.5 million as compared to December 31, 2015, where the amortized cost was $19.3 million. During the period ended March 31, 2016, the Company purchased a total of $3.0 million in GSEs and no GSE MBSs and did not make any purchases in the same period in 2015. As of March 31, 2016, four of the 20 securities were in unrealized loss positions as compared to December 31, 2015, where 16 of the 22 securities in this portfolio were in unrealized loss positions. All securities are performing and backed by the implicit (FHLB/FNMA/FHLMC) or explicit (GNMA) guarantee of the U.S Government.
Municipal Obligations
As of March 31, 2016, the Company owned 72 municipal obligation securities with a total fair value and total amortized cost of $39.8 million and $39.0 million, respectively, as compared to December 31, 2015 where the 72 municipal obligations had a total fair value and total amortized cost of $39.4 million and $39.1 million, respectively. During the periods ended March 31, 2016 and March 31, 2015, the Company did not purchase any municipal obligations. As of March 31, 2016, none of the 72 securities in this portfolio was in an unrealized loss position as compared to December 31, 2015, where 15 of the 72 securities in this portfolio were in unrealized loss positions.
Foreign Government Obligations
As of March 31, 2016 and December 31, 2015, the Company owned one foreign government obligation security with a fair value and amortized cost of $0.5 million. As of March 31, 2016, the foreign government obligation security was in an unrealized loss position as compared to December 31, 2015, where the security was not in an unrealized loss position. During the period ended March 31, 2016, the Company repurchased the same $0.5 million foreign government obligation securities that had matured in the same period. The Company did not purchase any foreign government obligation securities during the same period in 2015.

15

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

Portfolio Maturities
 
The final stated maturities of the debt securities are as follows at the dates indicated:
 
 
At March 31, 2016
 
At December 31, 2015
 
Amortized
Cost
 
Estimated
Fair Value
 
Weighted
Average
Rate
 
Amortized
Cost
 
Estimated
Fair Value
 
Weighted
Average
Rate
 
(Dollars in Thousands)
Investment securities available-for-sale:
 

 
 

 
 

 
 

 
 

 
 

Within 1 year
$
55

 
$
55

 
2.00
%
 
$
2,999

 
$
3,003

 
2.09
%
After 1 year through 5 years
56,364

 
57,680

 
2.30
%
 
59,729

 
60,249

 
2.32
%
After 5 years through 10 years
114,774

 
116,956

 
2.03
%
 
100,658

 
100,833

 
2.05
%
Over 10 years
359,356

 
360,498

 
1.95
%
 
353,259

 
348,139

 
1.97
%
 
$
530,549

 
$
535,189

 
2.00
%
 
$
516,645

 
$
512,224

 
2.03
%
Investment securities held-to-maturity:
 

 
 

 
 

 
 

 
 

 
 

Within 1 year
$
135

 
$
135

 
1.80
%
 
$
651

 
$
651

 
1.00
%
After 1 year through 5 years
18,502

 
18,625

 
1.36
%
 
23,888

 
23,866

 
1.52
%
After 5 years through 10 years
46,368

 
47,157

 
2.02
%
 
50,078

 
50,344

 
2.00
%
Over 10 years
18,404

 
18,373

 
1.69
%
 
19,140

 
18,834

 
1.82
%
 
$
83,409

 
$
84,290

 
1.80
%
 
$
93,757

 
$
93,695

 
1.83
%
 
Actual maturities of debt securities may differ from those presented above since certain obligations, particularly MBS and CMOs, amortize and provide the issuer the right to call or prepay the obligation prior to the scheduled final stated maturity without penalty.

At March 31, 2016, issuers of debt securities, excluding MBS and CMOs, with an estimated fair value of $34.4 million had the right to call or prepay the obligations. Of the $34.4 million, $6.1 million matures in 1 - 5 years, $27.2 million matures in 6 - 10 years, and $1.2 million matures after 10 years. At December 31, 2015, issuers of debt securities with an estimated fair value of $48.5 million had the right to call or prepay the obligations. Of the $48.5 million, $15.5 million matures in 1 - 5 years, $31.8 million matures in 6 - 10 years, and $1.3 million matures after ten years.

Security Sales

Security transactions are recorded on the trade date. When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. There were no security sales during the three-month periods ended March 31, 2016 and 2015.

16

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

(4)        Loans and Leases
 
The following tables present loan and lease balances and weighted average coupon rates for the originated and acquired loan and lease portfolios at the dates indicated:
 
 
At March 31, 2016
 
Originated
 
Acquired
 
Total
 
Balance
 
Weighted
Average
Coupon
 
Balance
 
Weighted
Average
Coupon
 
Balance
 
Weighted
Average
Coupon
 
(Dollars in Thousands)
Commercial real estate loans:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate
$
1,776,031

 
3.97
%
 
$
182,026

 
4.15
%
 
$
1,958,057

 
3.99
%
Multi-family mortgage
650,600

 
3.89
%
 
31,717

 
4.52
%
 
682,317

 
3.91
%
Construction
125,798

 
3.79
%
 
226

 
3.67
%
 
126,024

 
3.79
%
Total commercial real estate loans
2,552,429

 
3.94
%
 
213,969

 
4.20
%
 
2,766,398

 
3.96
%
Commercial loans and leases:
 

 
 

 
 

 
 

 
 

 
 

Commercial
601,727

 
3.91
%
 
14,563

 
5.82
%
 
616,290

 
3.96
%
Equipment financing
713,902

 
7.08
%
 
7,719

 
6.06
%
 
721,621

 
7.07
%
Condominium association
60,728

 
4.47
%
 

 
%
 
60,728

 
4.47
%
Total commercial loans and leases
1,376,357

 
5.58
%
 
22,282

 
5.90
%
 
1,398,639

 
5.59
%
Indirect automobile loans
11,220

 
5.47
%
 

 
%
 
11,220

 
5.47
%
Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
533,155

 
3.65
%
 
84,346

 
3.93
%
 
617,501

 
3.69
%
Home equity
243,795

 
3.47
%
 
75,064

 
4.01
%
 
318,859

 
3.60
%
Other consumer
17,707

 
3.81
%
 
121

 
17.66
%
 
17,828

 
3.90
%
Total consumer loans
794,657

 
3.60
%
 
159,531

 
3.98
%
 
954,188

 
3.66
%
Total loans and leases
$
4,734,663

 
4.36
%
 
$
395,782

 
4.21
%
 
$
5,130,445

 
4.35
%
 

17

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
At December 31, 2015
 
Originated
 
Acquired
 
Total
 
Balance
 
Weighted
Average
Coupon
 
Balance
 
Weighted
Average
Coupon
 
Balance
 
Weighted
Average
Coupon
 
(Dollars in Thousands)
Commercial real estate loans:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate
$
1,684,548

 
4.00
%
 
$
191,044

 
4.15
%
 
$
1,875,592

 
4.02
%
Multi-family mortgage
620,865

 
3.92
%
 
37,615

 
4.35
%
 
658,480

 
3.94
%
Construction
129,742

 
3.60
%
 
580

 
5.08
%
 
130,322

 
3.61
%
Total commercial real estate loans
2,435,155

 
3.96
%
 
229,239

 
4.19
%
 
2,664,394

 
3.98
%
Commercial loans and leases:
 

 
 

 
 

 
 

 
 

 
 

Commercial
576,599

 
3.90
%
 
15,932

 
5.65
%
 
592,531

 
3.95
%
Equipment financing
712,988

 
7.05
%
 
8,902

 
6.14
%
 
721,890

 
7.04
%
Condominium association
59,875

 
4.50
%
 

 
%
 
59,875

 
4.50
%
Total commercial loans and leases
1,349,462

 
5.59
%
 
24,834

 
5.83
%
 
1,374,296

 
5.59
%
Indirect automobile loans
13,678

 
5.53
%
 

 
%
 
13,678

 
5.53
%
Consumer loans:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage
527,846

 
3.64
%
 
88,603

 
3.85
%
 
616,449

 
3.67
%
Home equity
234,708

 
3.35
%
 
79,845

 
3.99
%
 
314,553

 
3.51
%
Other consumer
12,039

 
4.77
%
 
131

 
17.40
%
 
12,170

 
4.91
%
Total consumer loans
774,593

 
3.57
%
 
168,579

 
3.93
%
 
943,172

 
3.63
%
Total loans and leases
$
4,572,888

 
4.38
%
 
$
422,652

 
4.18
%
 
$
4,995,540

 
4.36
%
The net unamortized deferred loan origination fees and costs included in total loans and leases were $12.6 million and $12.8 million as of March 31, 2016 and December 31, 2015, respectively.
The Company's Banks and subsidiaries lend primarily in eastern Massachusetts, southern New Hampshire, and Rhode Island, with the exception of equipment financing, 32.9% of which is in the greater New York and New Jersey metropolitan area and 67.1% of which is in other areas in the United States of America at March 31, 2016, as compared to 32.8% of which is in the greater New York and New Jersey metropolitan area and 67.2% of which in other areas in the United States of America as of December 31, 2015.
 
Competition for the indirect automobile loans increased significantly as credit unions and large national banks entered indirect automobile lending. That competition drove interest rates down and, in some cases, changed the manner in which interest rates are developed, from including a dealer-shared spread to imposing a dealer-based fee to originate the loan. Given this market condition, Management ceased the Company's origination of indirect automobile loans in December 2014. For the quarter ended March 31, 2015, the Company sold over 90% of the portfolio for $255.2 million, which resulted in a loss of $11.8 thousand excluding the impact of the allowance for loan and lease losses.


18

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

Accretable Yield for the Acquired Loan Portfolio
 
The following table summarizes activity in the accretable yield for the acquired loan portfolio for the periods indicated:
 
 
Three Months Ended March 31,
 
2016
 
2015
 
(In Thousands)
Balance at beginning of period
$
20,796

 
$
32,044

Accretion
(1,184
)
 
(2,824
)
Reclassification from nonaccretable difference for loans with improved cash flows
1,290

 
1,440

Changes in expected cash flows that do not affect nonaccretable difference (1)
(1,102
)
 

Balance at end of period
$
19,800

 
$
30,660

(1) Represents changes in interest cash flows due to changes in interest rates on variable rate loans.
 
On a quarterly basis, subsequent to acquisition, Management reforecasts the expected cash flows for acquired ASC 310-30 loans, taking into account prepayment speeds, probability of default and loss given defaults. Management compares cash flow projections per the reforecast to the original cash flow projections and determines whether any reduction in cash flow expectations is due to credit deterioration, or if the change in cash flow expectations are related to noncredit events. This cash flow analysis is used to evaluate the need for a provision for loan and lease losses and/or prospective yield adjustments. During the three months ended March 31, 2016 and 2015, accretable yield adjustments totaling $1.3 million and $1.4 million, respectively, were made for certain loan pools. These prospective accretable yield adjustments, which are subject to continued re-assessment, will be recognized over the remaining lives of those pools.
 
The aggregate remaining nonaccretable difference applicable to acquired loans and leases totaled $1.3 million and $2.9 million at March 31, 2016 and December 31, 2015, respectively.
 
Loans and Leases Pledged as Collateral
 
At March 31, 2016 and December 31, 2015, there were $2.0 billion and $1.8 billion, respectively, of loans and leases pledged as collateral for repurchase agreements; municipal deposits; treasury, tax and loan deposits; swap agreements; and FHLBB borrowings. The Banks did not have any outstanding FRB borrowings at March 31, 2016 and December 31, 2015, respectively.


19

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

(5)      Allowance for Loan and Lease Losses
 
The following tables present the changes in the allowance for loan and lease losses and the recorded investment in loans and leases by portfolio segment for the periods indicated:
 
Three Months Ended March 31, 2016
 
Commercial
Real Estate
 
Commercial
 
Indirect
Automobile
 
Consumer
 
Unallocated
 
Total
 
(In Thousands)
Balance at December 31, 2015
$
30,151

 
$
22,018

 
$
269

 
$
4,301

 
$

 
$
56,739

Charge-offs
(331
)
 
(288
)
 
(244
)
 
(12
)
 

 
(875
)
Recoveries

 
224

 
231

 
20

 

 
475

Provision (credit) for loan and lease losses
1,164

 
1,024

 
(35
)
 
114

 

 
2,267

Balance at March 31, 2016
$
30,984

 
$
22,978

 
$
221

 
$
4,423

 
$

 
$
58,606

 
 
Three Months Ended March 31, 2015
 
Commercial
Real Estate
 
Commercial
 
Indirect
Automobile
 
Consumer
 
Unallocated
 
Total
 
(In Thousands)
Balance at December 31, 2014
$
29,594

 
$
15,957

 
$
2,331

 
$
3,359

 
$
2,418

 
$
53,659

Charge-offs
(388
)
 
(450
)
 
(820
)
 
(7
)
 

 
(1,665
)
Recoveries

 
212

 
581

 
18

 

 
811

Provision (credit) for loan and lease losses
254

 
3,365

 
(1,634
)
 
249

 
67

 
2,301

Balance at March 31, 2015
$
29,460

 
$
19,084

 
$
458

 
$
3,619

 
$
2,485

 
$
55,106

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The liability for unfunded credit commitments, which is included in other liabilities, was $1.4 million, $1.3 million and $1.2 million at March 31, 2016, December 31, 2015, and March 31, 2015, respectively. The changes in the liability for unfunded credit commitments reflects changes in the estimate of loss exposure associated with certain unfunded credit commitments. No credit commitments were charged off against the liability account in the three-month periods ended March 31, 2016 and 2015.

Provision for Credit Losses
 
The provision for credit losses are set forth below for the periods indicated:
 
 
Three Months Ended March 31,
 
2016
 
2015
 
(In Thousands)
Provision (credit) for loan and lease losses:
 

 
 

Commercial real estate
$
1,164

 
$
254

Commercial
1,024

 
3,365

Indirect automobile
(35
)
 
(1,634
)
Consumer
114

 
249

Unallocated

 
67

Total provision for loan and lease losses
2,267

 
2,301

Unfunded credit commitments
111

 
(38
)
Total provision for credit losses
$
2,378

 
$
2,263

 

 


20

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

Allowance for Loan and Lease Losses Methodology
 
Management has established a methodology to determine the adequacy of the allowance for loan and lease losses that assesses the risks and losses inherent in the loan and lease portfolio. Additions to the allowance for loan and lease losses are made by charges to the provision for credit losses. Losses on loans and leases are charged off against the allowance when all or a portion of a loan or lease is considered uncollectible. Subsequent recoveries on loans previously charged off, if any, are credited to the allowance when realized.

Management uses a consistent and systematic process and methodology to evaluate the adequacy of the allowance for loan and lease losses on a quarterly basis. For purposes of determining the allowance for loan and lease losses, the Company has segmented certain loans and leases in the portfolio by product type into the following segments: (1) commercial real estate loans, (2) commercial loans and leases, and (3) consumer loans. Portfolio segments are further disaggregated into classes based on the associated risks within the segments. Commercial real estate loans are divided into three classes: commercial real estate loans, multi-family mortgage loans, and construction loans. Commercial loans and leases are divided into three classes: commercial loans which includes taxi medallion loans, equipment financing, and loans to condominium associations. Consumer loans are divided into four classes: residential mortgage loans, home equity loans, indirect automobile loans, and other consumer loans. A formula-based credit evaluation approach is applied to each group, coupled with an analysis of certain loans for impairment. For each class of loan, Management makes significant judgments in selecting the estimation method that fits the credit characteristics of its class and portfolio segment as set forth below.
 
 The general allowance related to loans collectively evaluated for impairment is determined using a formula-based approach utilizing the risk ratings of individual credits and loss factors derived from historic portfolio loss rates, which include estimates of incurred losses over an estimated loss emergence period (“LEP”). The LEP was generated utilizing a charge-off look-back analysis which studied the time from the first indication of elevated risk of repayment (or other early event indicating a problem) to eventual charge-off to support the LEP considered in the allowance calculation. This reserving methodology established the approximate number of months of LEP that represents incurred losses for each portfolio. In addition to quantitative measures, relevant qualitative factors include, but are not limited to: (1) levels and trends in past due and impaired loans, (2) levels and trends in charge-offs, (3) changes in underwriting standards, policy exceptions, and credit policy, (4) experience of lending management and staff, (5) economic trends, (6) industry conditions, (7) effects of changes in credit concentrations, (8) interest rate environment, and (9) regulatory and other changes. The general allowance related to the acquired loans collectively evaluated for impairment is determined based upon the degree, if any, of deterioration in the pooled loans subsequent to acquisition. The qualitative factors used in the determination are the same as those used for originated loans.

During 2015, the Company enhanced and refined its general allowance methodology to provide a more precise quantification of probable losses in the portfolio. Under the enhanced methodology, Management combined the historical loss histories of the Banks to generate a single set of ratios. Management believes it is appropriate to aggregate the ratios as the Banks share common environmental factors, operate in similar markets, and utilize common underwriting standards in accordance with the Company's Credit Policy. In prior periods, a historical loss history applicable to each Bank was used.

Management employed a similar analysis for the consolidation of the qualitative factors as it did for the quantitative factors. Again, Management believes the realignment of the existing nine qualitative factors used at each of the Banks into a single group of factors for use across the Company is appropriate based on the commonality of environmental factors, markets, and underwriting standards among the Banks. In the periods prior to the third quarter of 2015, each of the Banks utilized a set of qualitative factors applicable to each Bank.

As of March 31, 2016, the Company had a portfolio of approximately $36.1 million in loans secured by taxi medallions issued by the cities of Boston and Cambridge.  Recently, application-based mobile ride services, such as Uber and Lyft, have generated increased competition in the taxi area, resulting in a reduction in taxi utilization and, as a result, a reduction in the collateral value and credit quality of taxi medallion loans.  This has increased the likelihood that loans secured by taxi medallions may default, or that the borrowers may be unable to repay these loans at maturity, potentially resulting in an increase in troubled debt restructurings, therefore, beginning with the quarter ended December 31, 2015, the Company’s allowance calculation included a further segmentation of the commercial loans and leases to reflect the increased risk in the Company’s taxi medallion portfolio. This allowance calculation segmentation represents Management’s estimations of the risks

21

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

associated with the portfolio, however, further declines in demand for taxi services or further deterioration in the value of taxi medallions may result in higher delinquencies and losses beyond that provided for in the allowance for loan and lease losses. 

Based on the refinements to the Company’s allowance methodology discussed above, Management determined that the potential risks anticipated by the unallocated allowance are now incorporated into the allowance methodology, making the unallocated allowance unnecessary. In the periods prior to the third quarter of 2015, the unallocated allowance was used to recognize the estimated risk associated with the allocated general and specific allowances. It incorporated Management’s evaluation of existing conditions that were not included in the allocated allowance determinations and provided for losses that arise outside of the ordinary course of business.

Specific valuation allowances are established for impaired originated loans with book values greater than the discounted present value of expected future cash flows or, in the case of collateral-dependent impaired loans, for any excess of a loan's book balance and the fair value of its underlying collateral. Specific valuation allowances are established for acquired loans with deterioration in the discounted present value of expected future cash flows since acquisitions or, in the case of collateral dependent impaired loans, for any increase in the excess of a loan's book balance greater than the fair value of its underlying collateral. A specific valuation allowance for losses on troubled debt restructured loans is determined by comparing the net carrying amount of the troubled debt restructured loan with the restructured loan's cash flows discounted at the original effective rate. Impaired loans are reviewed quarterly with adjustments made to the calculated reserve as necessary.

As of March 31, 2016, Management believes that the methodology for calculating the allowance is sound and that the allowance provides a reasonable basis for determining and reporting on probable losses in the Company’s loan portfolios.

The general allowance for loan and lease losses was $53.2 million at March 31, 2016, compared to $53.1 million at December 31, 2015. The general portion of the allowance for loan and lease losses increased by $0.1 million during the three months ended March 31, 2016, primarily driven by growth and offset by the decrease in historical loss factors applied to commercial real estate and commercial loan and lease portfolios.

The specific allowance for loan and lease losses was $5.4 million at March 31, 2016, compared to $3.6 million at December 31, 2015. The specific allowance increased $1.8 million during the three months ended March 31, 2016, primarily due to one commercial loan which was downgraded, changes in collateral values of previously impaired loans, and the restructure of taxi medallion loans.
 
Credit Quality Assessment

At the time of loan origination, a rating is assigned based on the financial strength of the borrower and the value of assets pledged as collateral. The Company continually monitors the asset quality of the loan portfolio using all available information. The officer responsible for handling each loan is required to initiate changes to risk ratings when changes in facts and circumstances occur that warrant an upgrade or downgrade in a loan rating. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as delinquent, impaired, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. If a restructured loan meets certain criteria, it may be categorized as a troubled debt restructuring.
 
The Company reviews numerous credit quality indicators when assessing the risk in its loan portfolio. For the Commercial Real Estate, multi-family mortgage, construction, commercial, equipment financing, condominium association, and other consumer loan and lease classes, the Company utilizes an eight-grade loan rating system, which assigns a risk rating to each borrower based on a number of quantitative and qualitative factors associated with a loan transaction. Factors considered include industry and market conditions; position within the industry; earnings trends; operating cash flow; asset/liability values; debt capacity; guarantor strength; management and controls; financial reporting; collateral; and other considerations. In addition, the Company’s independent loan review group evaluates the credit quality and related risk ratings of the commercial real estate and commercial loan portfolios. The results of these reviews are reported to the Board of Directors. For consumer loans, the Company primarily relies on payment status for monitoring credit risk.

The ratings categories used for assessing credit risk in the Commercial Real Estate, multi-family mortgage, construction, commercial, equipment financing, condominium association and other consumer loan and lease classes are defined as follows:

22

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
1-4 Rating — Pass
 
Loan rating grades “1” through “4” are classified as “Pass,” which indicates borrowers are performing in accordance with the terms of the loan and are less likely to result in losses due to the capacity of the borrowers to pay and the adequacy of the value of assets pledged as collateral.
 
5 Rating — Other Asset Especially Mentioned (“OAEM”)
 
Borrowers exhibit potential credit weaknesses or downward trends deserving Management’s attention. If not checked or corrected, these trends can weaken the Company’s asset position. While potentially weak, currently these borrowers are marginally acceptable; no loss of principal or interest is envisioned.
 
6 Rating — Substandard
 
Borrowers exhibit well-defined weaknesses that jeopardize the orderly liquidation of debt. Substandard loans may be inadequately protected by the current net worth and paying capacity of the obligors or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy. Although no loss of principal is envisioned, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation.
 
7 Rating — Doubtful
 
Borrowers exhibit well-defined weaknesses that jeopardize the orderly liquidation of debt with the added provision that the weaknesses make collection of the debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely.
 
8 Rating — Definite Loss
 
Borrowers deemed incapable of repayment. Loans to such borrowers are considered uncollectable and of such little value that continuation as active assets of the Company is not warranted.
 
Assets rated as “OAEM,” “substandard” or “doubtful” based on criteria established under banking regulations are collectively referred to as “criticized” assets.
 

23

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

Credit Quality Information
 
The following tables present the recorded investment in loans in each class at March 31, 2016 by credit quality indicator.
 
 
At March 31, 2016
 
Commercial
Real Estate
 
Multi-
 Family
Mortgage
 
Construction
 
Commercial
 
Equipment
Financing
 
Condominium
Association
 
Other
Consumer
 
(In Thousands)
Originated:
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan rating:
 

 
 

 
 

 
 

 
 

 
 

 
 

Pass
$
1,759,865

 
$
649,154

 
$
125,597

 
$
580,613

 
$
707,378

 
$
60,728

 
$
17,674

OAEM
13,332

 

 
201

 
8,459

 
904

 

 

Substandard
763

 
1,446

 

 
10,431

 
3,768

 

 
33

Doubtful
2,071

 

 

 
2,224

 
1,852

 

 

Total originated
1,776,031

 
650,600

 
125,798

 
601,727

 
713,902

 
60,728

 
17,707

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired:
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan rating:
 

 
 

 
 

 
 

 
 

 
 

 
 

Pass
171,436

 
30,710

 
226

 
9,768

 
7,719

 

 
121

OAEM
3,057

 
604

 

 
828

 

 

 

Substandard
7,442

 
403

 

 
3,967

 

 

 

Doubtful
91

 

 

 

 

 

 

Total acquired
182,026

 
31,717

 
226

 
14,563

 
7,719

 

 
121

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
1,958,057

 
$
682,317

 
$
126,024

 
$
616,290

 
$
721,621

 
$
60,728

 
$
17,828

 
At March 31, 2016, there were no loans categorized as definite loss.


 
At March 31, 2016
 
Indirect Automobile
 
($ In Thousands)
Originated:
 

 
 
Credit score:
 

 
 
Over 700
$
4,483

 
40.0
%
661-700
1,615

 
14.4
%
660 and below
5,084

 
45.3
%
Data not available
38

 
0.3
%
Total loans
$
11,220

 
100.0
%
 

24

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
At March 31, 2016
 
Residential Mortgage
 
Home Equity
 
($ In Thousands)
 
($ In Thousands)
Originated:
 

 
 
 
 

 
 
Loan-to-value ratio:
 

 
 
 
 

 
 
Less than 50%
$
120,177

 
19.5
%
 
$
140,472

 
44.1
%
50% - 69%
226,849

 
36.7
%
 
51,691

 
16.2
%
70% - 79%
168,958

 
27.3
%
 
32,621

 
10.2
%
80% and over
14,889

 
2.4
%
 
18,301

 
5.7
%
Data not available
2,282

 
0.4
%
 
710

 
0.2
%
Total originated
533,155

 
86.3
%
 
243,795

 
76.4
%
 
 
 
 
 
 
 
 
Acquired:
 

 
 
 
 

 
 
Loan-to-value ratio:
 

 
 
 
 

 
 
Less than 50%
19,067

 
3.1
%
 
45,720

 
14.3
%
50% - 69%
30,539

 
4.9
%
 
19,943

 
6.3
%
70% - 79%
17,693

 
2.9
%
 
6,109

 
1.9
%
80% and over
13,336

 
2.2
%
 
2,499

 
0.8
%
Data not available
3,711

 
0.6
%
 
793

 
0.3
%
Total acquired
84,346

 
13.7
%
 
75,064

 
23.6
%
 
 
 
 
 
 
 
 
Total loans and leases
$
617,501

 
100.0
%
 
$
318,859

 
100.0
%
 

25

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

The following tables present the recorded investment in loans in each class at December 31, 2015 by credit quality indicator.
 
At December 31, 2015
 
Commercial
Real Estate
 
Multi-
 Family
Mortgage
 
Construction
 
Commercial
 
Equipment
Financing
 
Condominium
Association
 
Other
Consumer
 
(In Thousands)
Originated:
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan rating:
 

 
 

 
 

 
 

 
 

 
 

 
 

Pass
$
1,668,891

 
$
619,786

 
$
129,534

 
$
562,615

 
$
709,381

 
$
59,875

 
$
12,017

OAEM
12,781

 
788

 
208

 
9,976

 
804

 

 

Substandard
780

 
291

 

 
1,714

 
1,414

 

 
22

Doubtful
2,096

 

 

 
2,294

 
1,389

 

 

Total originated
1,684,548

 
620,865

 
129,742

 
576,599

 
712,988

 
59,875

 
12,039

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired:
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan rating:
 

 
 

 
 

 
 

 
 

 
 

 
 

Pass
182,377

 
35,785

 
580

 
11,959

 
8,902

 

 
131

OAEM
1,202

 
612

 

 
902

 

 

 

Substandard
7,066

 
1,218

 

 
3,071

 

 

 

Doubtful
399

 

 

 

 

 

 

Total acquired
191,044

 
37,615

 
580

 
15,932

 
8,902

 

 
131

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
1,875,592

 
$
658,480

 
$
130,322

 
$
592,531

 
$
721,890

 
$
59,875

 
$
12,170


At December 31, 2015, there were no loans categorized as definite loss.
 
 
At December 31, 2015
 
Indirect Automobile
 
($ In Thousands)
Originated:
 

 
 
Credit score:
 

 
 
Over 700
$
5,435

 
39.7
%
661-700
1,965

 
14.4
%
660 and below
6,217

 
45.5
%
Data not available
61

 
0.4
%
Total loans
$
13,678

 
100.0
%
 

26

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
At December 31, 2015
 
Residential Mortgage
 
Home Equity
 
($ In Thousands)
 
($ In Thousands)
Originated:
 

 
 
 
 

 
 
Loan-to-value ratio:
 

 
 
 
 

 
 
Less than 50%
$
118,628

 
19.2
%
 
$
131,584

 
41.8
%
50% - 69%
214,390

 
34.8
%
 
51,492

 
16.4
%
70% - 79%
173,774

 
28.2
%
 
32,916

 
10.5
%
80% and over
17,808

 
2.9
%
 
18,082

 
5.7
%
Data not available
3,246

 
0.5
%
 
634

 
0.2
%
Total originated
527,846

 
85.6
%
 
234,708

 
74.6
%
 
 
 
 
 
 
 
 
Acquired:
 

 
 
 
 

 
 
Loan-to-value ratio:
 

 
 
 
 

 
 
Less than 50%
18,857

 
3.1
%
 
48,563

 
15.4
%
50% - 69%
32,986

 
5.3
%
 
20,623

 
6.6
%
70% - 79%
17,883

 
2.9
%
 
7,144

 
2.3
%
80% and over
14,011

 
2.3
%
 
2,650

 
0.8
%
Data not available
4,866

 
0.8
%
 
865

 
0.3
%
Total acquired
88,603

 
14.4
%
 
79,845

 
25.4
%
 
 
 
 
 
 
 
 
Total loans
$
616,449

 
100.0
%
 
$
314,553

 
100.0
%

The following table presents information regarding foreclosed residential real estate property at March 31, 2016.
 
At March 31, 2016
 
(In Thousands)
Foreclosed residential real estate property held by the creditor
$
40

Recorded investment in mortgage loans collateralized by residential real estate property that are in the process of foreclosure
728



27

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

Age Analysis of Past Due Loans and Leases
 
The following tables present an age analysis of the recorded investment in total loans and leases at March 31, 2016 and December 31, 2015.
 
At March 31, 2016
 
Past Due
 
 
 
 
 
Loans and
Leases Past
 
 
 
31-60
 Days
 
61-90
Days
 
Greater
 Than 90
 Days
 
Total
 
Current
 
Total Loans
and Leases
 
Due Greater
Than 90 Days
and Accruing
 
Nonaccrual
Loans and
Leases
 
(In Thousands)
Originated:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
13,854

 
$

 
$
2,072

 
$
15,926

 
$
1,760,105

 
$
1,776,031

 
$

 
$
2,834

Multi-family mortgage
2

 
291

 
16

 
309

 
650,291

 
650,600

 
16

 
1,446

Construction

 

 

 

 
125,798

 
125,798

 

 

Total commercial real estate loans
13,856

 
291

 
2,088

 
16,235

 
2,536,194

 
2,552,429

 
16

 
4,280

Commercial loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
5,668

 
886

 
4,260

 
10,814

 
590,913

 
601,727

 

 
12,166

Equipment financing
1,184

 
2,998

 
2,045

 
6,227

 
707,675

 
713,902

 
132

 
5,391

Condominium association

 
1

 

 
1

 
60,727

 
60,728

 

 

Total commercial loans and leases
6,852

 
3,885

 
6,305

 
17,042

 
1,359,315

 
1,376,357

 
132

 
17,557

Indirect automobile
616

 
171

 
5

 
792

 
10,428

 
11,220

 

 
308

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
3,093

 
222

 
29

 
3,344

 
529,811

 
533,155

 

 
1,656

Home equity
149

 
1

 
246

 
396

 
243,399

 
243,795

 

 
422

Other consumer
20

 
4

 
28

 
52

 
17,655

 
17,707

 

 
34

Total consumer loans
3,262

 
227

 
303

 
3,792

 
790,865

 
794,657

 

 
2,112

Total originated loans and leases
$
24,586

 
$
4,574

 
$
8,701

 
$
37,861

 
$
4,696,802

 
$
4,734,663

 
$
148

 
$
24,257

 

28

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
At March 31, 2016
 
Past Due
 
 
 
 
 
Loans and
Leases Past
 
 
 
31-60
 Days
 
61-90
Days
 
Greater
 Than 90
 Days
 
Total
 
Current
 
Total Loans
and Leases
 
Due Greater
Than 90 Days
and Accruing
 
Nonaccrual
Loans and
Leases
 
(In Thousands)
Acquired:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
1,031

 
$
228

 
$
3,785

 
$
5,044

 
$
176,982

 
$
182,026

 
$
1,179

 
$
2,606

Multi-family mortgage

 

 

 

 
31,717

 
31,717

 

 

Construction

 

 

 

 
226

 
226

 

 

Total commercial real estate loans
1,031

 
228

 
3,785

 
5,044

 
208,925

 
213,969

 
1,179

 
2,606

Commercial loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
229

 
315

 
3,173

 
3,717

 
10,846

 
14,563

 
323

 
2,884

Equipment financing

 

 

 

 
7,719

 
7,719

 

 

Total commercial loans and leases
229

 
315

 
3,173

 
3,717

 
18,565

 
22,282

 
323

 
2,884

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
269

 
484

 
2,072

 
2,825

 
81,521

 
84,346

 
1,720

 
476

Home equity
1,011

 
344

 
716

 
2,071

 
72,993

 
75,064

 
142

 
1,682

Other consumer

 

 

 

 
121

 
121

 

 

Total consumer loans
1,280

 
828

 
2,788

 
4,896

 
154,635

 
159,531

 
1,862

 
2,158

Total acquired loans and leases
$
2,540

 
$
1,371

 
$
9,746

 
$
13,657

 
$
382,125

 
$
395,782

 
$
3,364

 
$
7,648

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
27,126

 
$
5,945

 
$
18,447

 
$
51,518

 
$
5,078,927

 
$
5,130,445

 
$
3,512

 
$
31,905



29

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
At December 31, 2015
 
Past Due
 
 
 
 
 
Loans and
Leases Past
 
 
 
31-60
 Days
 
61-90
Days
 
Greater
 Than 90
 Days
 
Total
 
Current
 
Total Loans
and Leases
 
Due Greater
Than 90 Days
and Accruing
 
Nonaccrual
Loans and
Leases
 
(In Thousands)
Originated:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
1,782

 
$

 
$
2,097

 
$
3,879

 
$
1,680,669

 
$
1,684,548

 
$

 
$
2,876

Multi-family mortgage

 

 
16

 
16

 
620,849

 
620,865

 
16

 
291

Construction
652

 

 

 
652

 
129,090

 
129,742

 

 

Total commercial real estate loans
2,434

 

 
2,113

 
4,547

 
2,430,608

 
2,435,155

 
16

 
3,167

Commercial loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
4,578

 
1,007

 
2,368

 
7,953

 
568,646

 
576,599

 
24

 
3,586

Equipment financing
1,681

 
595

 
2,143

 
4,419

 
708,569

 
712,988

 
77

 
2,610

Condominium association
205

 
124

 

 
329

 
59,546

 
59,875

 

 

Total commercial loans and leases
6,464

 
1,726

 
4,511

 
12,701

 
1,336,761

 
1,349,462

 
101

 
6,196

Indirect automobile
1,058

 
335

 
106

 
1,499

 
12,179

 
13,678

 

 
675

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
1,384

 

 
229

 
1,613

 
526,233

 
527,846

 

 
1,873

Home equity
390

 
237

 
9

 
636

 
234,072

 
234,708

 

 
319

Other consumer
19

 
2

 
25

 
46

 
11,993

 
12,039

 

 
29

Total consumer loans
1,793

 
239

 
263

 
2,295

 
772,298

 
774,593

 

 
2,221

Total originated loans and leases
$
11,749

 
$
2,300

 
$
6,993

 
$
21,042

 
$
4,551,846

 
$
4,572,888

 
$
117

 
$
12,259

 

30

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
At December 31, 2015
 
Past Due
 
 
 
 
 
Loans and
Leases Past
 
 
 
31-60
 Days
 
61-90
Days
 
Greater
 Than 90
 Days
 
Total
 
Current
 
Total Loans
and Leases
 
Due Greater
Than 90 Days
and Accruing
 
Nonaccrual
Loans and
Leases
 
(In Thousands)
Acquired:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
1,336

 
$
369

 
$
7,588

 
$
9,293

 
$
181,751

 
$
191,044

 
$
4,982

 
$
2,606

Multi-family mortgage

 

 
1,077

 
1,077

 
36,538

 
37,615

 
1,077

 

Construction

 

 

 

 
580

 
580

 

 

Total commercial real estate loans
1,336

 
369

 
8,665

 
10,370

 
218,869

 
229,239

 
6,059

 
2,606

Commercial loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
351

 
23

 
2,967

 
3,341

 
12,591

 
15,932

 
325

 
2,678

Equipment financing

 

 

 

 
8,902

 
8,902

 

 

Total commercial loans and leases
351

 
23

 
2,967

 
3,341

 
21,493

 
24,834

 
325

 
2,678

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
326

 
216

 
2,399

 
2,941

 
85,662

 
88,603

 
2,047

 
352

Home equity
1,012

 
386

 
460

 
1,858

 
77,987

 
79,845

 
142

 
1,438

Other consumer

 

 

 

 
131

 
131

 

 

Total consumer loans
1,338

 
602

 
2,859

 
4,799

 
163,780

 
168,579

 
2,189

 
1,790

Total acquired loans and leases
$
3,025

 
$
994

 
$
14,491

 
$
18,510

 
$
404,142

 
$
422,652

 
$
8,573

 
$
7,074

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loan and leases
$
14,774

 
$
3,294

 
$
21,484

 
$
39,552

 
$
4,955,988

 
$
4,995,540

 
$
8,690

 
$
19,333

 
Commercial Real Estate Loans — At March 31, 2016, loans outstanding in the three classes within this segment expressed as a percentage of total loans and leases outstanding were as follows: commercial real estate loans — 38.2%; multi-family mortgage loans — 13.3%; and construction loans — 2.5%.
 
Loans in this portfolio that are on nonaccrual status and/or risk-rated “substandard” or worse are evaluated on an individual loan basis for impairment. For non-impaired commercial real estate loans, loss factors are applied to outstanding loans by risk rating for each of the three classes in the portfolio. The factors applied are based primarily on historic loan loss experience and an assessment of internal and external factors and other relevant information.
 
Commercial Loans and Leases — At March 31, 2016, loans and leases outstanding in the three classes within this segment expressed as a percent of total loans and leases outstanding were as follows: commercial loans and leases — 12.0%; equipment financing loans — 14.1%; and loans to condominium associations — 1.2%.
 
Loans and leases in this portfolio that are on nonaccrual status and/or risk-rated “substandard” or worse are evaluated on an individual basis for impairment. For non-impaired commercial loans and leases, loss factors are applied to outstanding loans by risk rating for the respective class in the portfolio.
 
Consumer Loans — At March 31, 2016, loans outstanding within the four classes within this segment expressed as a percent of total loans and leases outstanding were as follows: residential mortgage loans — 12.0%; home equity loans — 6.2%; indirect automobile loans — 0.2% , and other consumer loans — 0.3%.
 

31

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

Significant risk characteristics related to the residential mortgage and home equity loan portfolios are the geographic concentration of the properties financed within selected communities in the greater Boston and Providence metropolitan areas. The payment status and loan-to-value ratio are the primary credit quality indicators used for residential mortgage loans and home equity loans. Generally, loans are not made when the loan-to-value ratio exceeds 80% unless private mortgage insurance is obtained and/or there is a financially strong guarantor. Consumer loans that become 90 days or more past due, or are placed on nonaccrual regardless of past due status, are reviewed on an individual basis for impairment by assessing the net realizable value of underlying collateral and the economic condition of the borrower.
 
Impaired Loans and Leases
 
A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. The Company has defined the population of impaired loans to include nonaccrual loans and troubled debt restructured loans.

When the ultimate collectability of the total principal of an impaired loan or lease is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan or lease is not in doubt and the loan or lease is on nonaccrual status, contractual interest is credited to interest income when received, under the cash basis method.
 
The following tables include the recorded investment and unpaid principal balances of impaired loans and leases with the related allowance amount, if applicable, for the originated and acquired loan and lease portfolios at the dates indicated. Also presented are the average recorded investments in the impaired loans and leases and the related amount of interest recognized during the period that the impaired loans were impaired.



32

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
At March 31, 2016
 
At December 31, 2015
 
Recorded
Investment
(1)
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment (2)
 
Unpaid
Principal
Balance
 
Related
Allowance
 
(In Thousands)
Originated:
 

 
 

 
 

 
 

 
 

 
 

With no related allowance recorded:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate
$
3,884

 
$
3,877

 
$

 
$
2,758

 
$
2,756

 
$

Commercial
13,463

 
13,443

 

 
14,097

 
14,074

 

Consumer
4,470

 
4,461

 

 
4,582

 
4,575

 

Total originated with no related allowance recorded
21,817

 
21,781

 

 
21,437

 
21,405

 

With an allowance recorded:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate
6,107

 
6,107

 
2,131

 
6,150

 
6,150

 
2,167

Commercial
10,935

 
10,920

 
2,720

 
2,215

 
2,213

 
1,202

Consumer

 

 

 

 

 

Total originated with an allowance recorded
17,042

 
17,027

 
4,851

 
8,365

 
8,363

 
3,369

Total originated impaired loans and leases
38,859

 
38,808

 
4,851

 
29,802

 
29,768

 
3,369

 
 
 
 
 
 
 
 
 
 
 
 
Acquired:
 

 
 

 
 

 
 

 
 

 
 

With no related allowance recorded:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate
5,705

 
5,705

 

 
7,035

 
7,035

 

Commercial
4,255

 
4,255

 

 
4,053

 
4,052

 

Consumer
7,126

 
7,141

 

 
7,549

 
7,565

 

Total acquired with no related allowance recorded
17,086


17,101




18,637


18,652



With an allowance recorded:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate
2,606

 
2,606

 
308

 
2,606

 
2,606

 
148

Commercial
486

 
486

 
185

 
486

 
486

 
112

Consumer
524

 
524

 
58

 
174

 
174

 
9

 Total acquired with an allowance recorded
3,616


3,616


551


3,266


3,266


269

Total acquired impaired loans and leases
20,702


20,717


551


21,903


21,918


269

 
 
 
 
 
 
 
 
 
 
 
 
Total impaired loans and leases
$
59,561

 
$
59,525

 
$
5,402

 
$
51,705

 
$
51,686

 
$
3,638


(1)Includes originated and acquired nonaccrual loans of $19.7 million and $7.7 million, respectively, at March 31, 2016.
(2)Includes originated and acquired nonaccrual loans of $9.3 million and $7.1 million, respectively, at December 31, 2015.



33

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(In Thousands)
Originated:
 

 
 

 
 

 
 

With no related allowance recorded:
 

 
 

 
 

 
 

Commercial real estate
$
3,124

 
$
21

 
$
4,928

 
$
22

Commercial
13,775

 
150

 
15,231

 
152

Consumer
4,488

 
20

 
4,080

 
15

Total originated with no related allowance recorded
21,387

 
191

 
24,239

 
189

With an allowance recorded:
 

 
 

 
 

 
 

Commercial real estate
6,122

 
49

 
4,109

 
50

Commercial
11,283

 
1

 
5,862

 
3

Consumer

 

 
172

 

Total originated with an allowance recorded
17,405

 
50

 
10,143

 
53

Total originated impaired loans and leases
38,792

 
241

 
34,382

 
242

 
 
 
 
 
 
 
 
Acquired:
 

 
 

 
 

 
 

With no related allowance recorded:
 

 
 

 
 

 
 

Commercial real estate
6,036

 
10

 
10,329

 
37

Commercial
4,276

 
18

 
4,503

 
15

Consumer
7,167

 
17

 
7,391

 
15

Total acquired with no related allowance recorded
17,479

 
45

 
22,223

 
67

With an allowance recorded:
 

 
 

 
 

 
 

Commercial real estate
2,606

 

 
244

 

Commercial
486

 

 
872

 

Consumer
525

 
2

 
360

 
2

  Total acquired with an allowance recorded
3,617

 
2

 
1,476

 
2

Total acquired impaired loans and leases
21,096

 
47

 
23,699

 
69

 
 
 
 
 
 
 
 
Total impaired loans and leases
$
59,888

 
$
288

 
$
58,081

 
$
311

 
 
 
 
 
 
 
 
  

34

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

The following tables present information regarding impaired and non-impaired loans and leases at the dates indicated:
 
At March 31, 2016
 
Commercial Real Estate
 
Commercial
 
Indirect Automobile
 
Consumer
 
Unallocated
 
Total
 
(In Thousands)
Allowance for Loan and Lease Losses:
 
 
 
 
 
 
 
 
 
 
 
Originated:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,131

 
$
2,720

 
$

 
$

 
$

 
$
4,851

Collectively evaluated for impairment
27,586

 
19,921

 
221

 
4,089

 

 
51,817

Total originated loans and leases
29,717

 
22,641

 
221

 
4,089

 

 
56,668

 
 
 
 
 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
308

 
185

 

 
58

 

 
551

Collectively evaluated for impairment
296

 
64

 

 
45

 

 
405

Acquired with deteriorated credit quality
663

 
88

 

 
231

 

 
982

Total acquired loans and leases
1,267

 
337

 

 
334

 

 
1,938

 
 
 
 
 
 
 
 
 
 
 
 
Total allowance for loan and lease losses
$
30,984

 
$
22,978

 
$
221

 
$
4,423

 
$

 
$
58,606

 
 
 
 
 
 
 
 
 
 
 
 
Loans and Leases:
 
 
 
 
 
 
 
 
 
 
 
Originated:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
9,991

 
$
23,830

 
$

 
$
4,339

 
$

 
$
38,160

Collectively evaluated for impairment
2,542,438

 
1,352,527

 
11,220

 
790,318

 

 
4,696,503

Total originated loans and leases
2,552,429

 
1,376,357

 
11,220

 
794,657

 

 
4,734,663

 
 
 
 
 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
3,176

 
4,208

 

 
2,963

 

 
10,347

Collectively evaluated for impairment
60,975

 
9,691

 

 
97,493

 

 
168,159

Acquired with deteriorated credit quality
149,818

 
8,383

 

 
59,075

 

 
217,276

Total acquired loans and leases
213,969

 
22,282

 

 
159,531

 

 
395,782

 
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
2,766,398

 
$
1,398,639

 
$
11,220

 
$
954,188

 
$

 
$
5,130,445



35

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
At December 31, 2015
 
Commercial Real Estate
 
Commercial
 
Indirect Automobile
 
Consumer
 
Unallocated
 
Total
 
(In Thousands)
Allowance for Loan and Lease Losses:
 
 
 
 
 
 
 
 
 
 
 
Originated:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,167

 
$
1,202

 
$

 
$

 
$

 
$
3,369

Collectively evaluated for impairment
26,857

 
20,545

 
269

 
3,947

 

 
51,618

Total originated loans and leases
29,024

 
21,747

 
269

 
3,947

 

 
54,987

 
 
 
 
 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
148

 
112

 

 
9

 

 
269

Collectively evaluated for impairment
333

 
71

 

 
45

 

 
449

Acquired with deteriorated credit quality
646

 
88

 

 
300

 

 
1,034

Total acquired loans and leases
1,127

 
271

 

 
354

 

 
1,752

 
 
 
 
 
 
 
 
 
 
 
 
Total allowance for loan and lease losses
$
30,151

 
$
22,018

 
$
269

 
$
4,301

 
$

 
$
56,739

 
 
 
 
 
 
 
 
 
 
 
 
Loans and Leases:
 
 
 
 
 
 
 
 
 
 
 
Originated:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
8,907

 
$
15,806

 
$

 
$
4,471

 
$

 
$
29,184

Collectively evaluated for impairment
2,426,248

 
1,333,656

 
13,678

 
770,122

 

 
4,543,704

Total originated loans and leases
2,435,155

 
1,349,462

 
13,678

 
774,593

 

 
4,572,888

 
 
 
 
 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
3,188

 
4,090

 

 
2,606

 

 
9,884

Collectively evaluated for impairment
63,857

 
12,081

 

 
105,146

 

 
181,084

Acquired with deteriorated credit quality
162,194

 
8,663

 

 
60,827

 

 
231,684

Total acquired loans and leases
229,239

 
24,834

 

 
168,579

 

 
422,652

 
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
2,664,394

 
$
1,374,296

 
$
13,678

 
$
943,172

 
$

 
$
4,995,540

 
Troubled Debt Restructured Loans and Leases
 
A specific valuation allowance for losses on troubled debt restructured loans is determined by comparing the net carrying amount of the troubled debt restructured loan with the restructured loan's cash flows discounted at the original effective rate.

The following table sets forth information regarding troubled debt restructured loans and leases at the dates indicated:
 
At March 31, 2016
 
At December 31, 2015
 
(In Thousands)
Troubled debt restructurings:
 

 
 

On accrual
$
16,697

 
$
17,953

On nonaccrual
14,614

 
4,965

Total troubled debt restructurings
$
31,311

 
$
22,918


36

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

The recorded investment in troubled debt restructurings and the associated specific allowances for loan and lease losses, in the originated and acquired loan and lease portfolios, are as follows for the periods indicated.

 
At and for the Three Months Ended March 31, 2016
 
Recorded Investment
 
Specific
 
 
 
Defaulted(1)
 
Number
of Loans/
Leases
 
At
Modification
 
At End of
Period
 
Allowance for
Loan and
Lease Losses
 
Nonaccrual
Loans and
Leases
 
Additional
Commitment
 
Number of
Loans/
Leases
 
Recorded
Investment
 
(Dollars in Thousands)
Originated:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate

2

 
$
1,155

 
$
1,155

 
$

 
$
1,155

 
$

 

 
$

Commercial
16

 
7,268

 
7,256

 
2,156

 
7,256

 

 

 

Equipment financing
2

 
364

 
364

 

 
364

 

 

 

Total Originated
20

 
8,787

 
8,775

 
2,156

 
8,775

 

 

 


(1) Includes loans and leases that have been modified within the past twelve months and subsequently had payment defaults during the period indicated.

For the three months ended March 31, 2016, there were no troubled debt restructurings in the Company's acquired portfolio.

 
At and for the Three Months Ended March 31, 2015
 
Recorded Investment
 
Specific
 
 
 
Defaulted(1)
 
Number 
of Loans/
Leases
 
At
Modification
 
At End of
Period
 
Allowance for
Loan and
Lease Losses
 
Nonaccrual
Loans and
Leases
 
Additional
Commitment
 
Number of
Loans/
Leases
 
Recorded
Investment
 
(Dollars in Thousands)
Originated:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial
3

 
$
2,569

 
$
2,568

 
$

 
$
248

 
$

 
1

 
$
248

Equipment financing
1

 
112

 
112

 

 

 

 
1

 
491

Total Originated
4

 
2,681

 
2,680

 

 
248

 

 
2

 
739

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
1

 
13

 
13

 

 
13

 

 
2

 
406

Residential mortgage
1

 
140

 
140

 
12

 

 

 

 

Total Acquired
2


153


153


12


13




2


406

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
6


$
2,834


$
2,833


$
12


$
261


$


4


$
1,145


(1) Includes loans and leases that have been modified within the past twelve months and subsequently had payment defaults during the period indicated.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


37

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

The following table sets forth the Company’s balances of troubled debt restructurings that were modified at the dates indicated, by type of modification.
 
Three Months Ended March 31,
 
2016
 
2015
 
(In Thousands)
Loans with one modification:
 

 
 

Adjusted interest rate

 
140

Interest only
2,412

 

Combination maturity, principal, interest rate
6,363

 
125

Total loans with one modification
8,775

 
265

 
 
 
 
Loans with more than one modification:
 

 
 

Extended maturity

 
2,568

Total loans with more than one modification

 
2,568

 
 
 
 
Total loans with modifications
$
8,775

 
$
2,833

 
There were no charge-offs or recoveries for the performing and nonperforming troubled debt restructuring loans and leases for the three months ended March 31, 2016. The net charge-offs of the performing and nonperforming troubled debt restructuring loans and leases for the three months ended March 31, 2015 was $30 thousand.
 
As of March 31, 2016 and 2015, there were no commitments to lend funds to debtors owing receivables whose terms had been modified in troubled debt restructurings.
 
(6)               Goodwill and Other Intangible Assets
 
The following table sets forth the carrying value of goodwill and other intangible assets at the dates indicated:

 
At March 31, 2016
 
At December 31, 2015
 
(In Thousands)
Goodwill
$
137,890

 
$
137,890

Other intangible assets:
 

 
 

Core deposits
8,909

 
9,544

Trade name
1,089

 
1,089

Total other intangible assets
9,998

 
10,633

Total goodwill and other intangible assets
$
147,888

 
$
148,523

 
The Company concluded that the BankRI name would continue to be utilized in its marketing strategies; therefore, the trade name with a carrying value of $1.1 million has an indefinite life.

38

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015


The estimated aggregate future amortization expense (in thousands) for intangible assets with a finite life remaining at March 31, 2016 is as follows:
 
Remainder of 2016
$
1,865

Year ending:
 
2017
2,089

2018
1,669

2019
1,295

2020
944

Thereafter
1,047

Total
$
8,909


(7)               Comprehensive Income/(Loss)
 
Comprehensive income (loss) represents the sum of net income (loss) and other comprehensive income (loss). For the three months ended March 31, 2016 and March 31, 2015, the Company’s other comprehensive income (loss) include the following two components: (1) unrealized holding gains (losses) on investment securities available-for-sale, and (2) adjustment of accumulated obligation for postretirement benefits.

Changes in accumulated other comprehensive income (loss) by component, net of tax, were as follows for the periods indicated:
 
Three Months Ended March 31, 2016
 
Investment
Securities
 Available-for-Sale
 
Postretirement
Benefits
 
Accumulated Other
Comprehensive
(Loss) Income
 
(In Thousands)
Balance at December 31, 2015
$
(2,827
)
 
$
351

 
$
(2,476
)
Other comprehensive income
5,828

 

 
5,828

Balance at March 31, 2016
$
3,001

 
$
351

 
$
3,352



 
Three Months Ended March 31, 2015
 
Investment
Securities Available-for-Sale
 
Postretirement
Benefits
 
Accumulated Other
Comprehensive
(Loss) Income
 
(In Thousands)
Balance at December 31, 2014
$
(1,733
)
 
$
111

 
$
(1,622
)
Other comprehensive income
3,369

 

 
3,369

Balance at March 31, 2015
$
1,636

 
$
111

 
$
1,747


The Company did not reclassify any amounts out of accumulated other comprehensive income (loss) for the three months ended March 31, 2016 and March 31, 2015.

(8)       Derivatives and Hedging Activities
 
The Company may use interest-rate contracts (swaps, caps, and floors) as part of its interest-rate risk management strategy. Interest-rate swap, cap and floor agreements are entered into as hedges against future interest-rate fluctuations on specifically identified assets or liabilities. The Company did not have derivative fair value hedges or derivative cash flow hedges at March 31, 2016 or December 31, 2015.
 

39

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

Derivatives not designated as hedges are not speculative but rather, result from a service the Company provides to certain commercial banking customers for a fee. The Company executes interest-rate swaps with certain commercial banking customers to aid them in managing their interest-rate risk. The interest-rate swap contracts allow the commercial banking customers to convert floating-rate loan payments to fixed-rate loan payments. The credit risks associated with the interest-rate swaps entered into with our commercial banking customers are consistent with those involved in extending loans. Interest-rate swap transactions are subject to the Company's credit policy including collateral requirements consistent with the Company's assessment of the customers' credit quality.

The Company concurrently enters into offsetting swaps with a third-party financial institution, effectively minimizing its net risk exposure resulting from such transactions. The third-party financial institution exchanges the customer’s fixed-rate loan payments for floating-rate loan payments.

As the interest-rate swaps associated with this program do not meet hedge accounting requirements and the requirement of the underlying collateral of the customer swaps, the fair value of the customer swaps and the offsetting swaps are not materially different and do not significantly impact the Company’s results of operations. The Company had 74 interest-rate swaps related to this program with an aggregate notional amount of $583.0 million at March 31, 2016, compared with 64 interest-rate swaps with an aggregate notional amount of $490.6 million at December 31, 2015.
 
Asset derivatives and liability derivatives are included in other assets and accrued expenses and other liabilities on the unaudited consolidated balance sheets, respectively. The table below presents the fair value and classification of the Company’s derivative financial instruments at March 31, 2016 and December 31, 2015.
 
 
At March 31, 2016
 
At December 31, 2015
 
Asset
Derivatives
 
Liability
Derivatives
 
Asset
Derivatives
 
Liability
Derivatives
 
(In Thousands)
Total derivatives (interest-rate products) not designated as hedging instruments
$
18,583

 
$
18,583

 
$
8,656

 
$
8,781

 
Certain derivative agreements contain provisions that require the Company to pledge collateral (in the form of financial instruments and/or cash) if the derivative exposure exceeds a threshold amount. The Company has pledged collateral of $30.6 million and $14.7 million in the normal course of business at March 31, 2016 and December 31, 2015, respectively.

The tables below present the offsetting of derivatives and amounts subject to master netting agreements not offset in the unaudited consolidated balance sheet at the dates indicated.
 
 
At March 31, 2016
 
Gross
Amounts of
Recognized
 
Gross Amounts
Offset in the
Statement of Financial Position
 
Net Amounts of
Assets Presented in
the Statement of Financial Position
 
Gross Amounts Not Offset in the
Statement of Financial Position
 
Net Amount
 
 
 
 
Financial Instruments Pledged
 
Cash Collateral Pledged
 
 
(In Thousands)
Asset Derivatives
$
18,583

 
$

 
$
18,583

 
$

 
$

 
$
18,583

 
 
 
 
 
 
 
 
 
 
 
 
Liability Derivatives
$
18,583

 
$

 
$
18,583

 
$
30,607

 
$

 
$

 

40

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
At December 31, 2015
 
Gross
Amounts of
Recognized
 
Gross Amounts
Offset in the
Statement of Financial Position
 
Net Amounts of
Assets Presented in
the Statement of Financial Position
 
Gross Amounts Not Offset in the
Statement of Financial Position
 
Net Amount
 
 
 
 
Financial Instruments Pledged
 
Cash Collateral Pledged
 
 
(In Thousands)
Asset Derivatives
$
8,656

 
$

 
$
8,656

 
$

 
$

 
$
8,656

 
 
 
 
 
 
 
 
 
 
 
 
Liability Derivatives
$
8,781

 
$

 
$
8,781

 
$
9,873

 
$
4,790

 
$


The Company has agreements with certain of its derivative counterparties that contain credit-risk-related contingent provisions. These provisions provide the counterparty with the right to terminate its derivative positions and require the Company to settle its obligations under the agreements if the Company defaults on certain of its indebtedness or if the Company fails to maintain its status as a well-capitalized institution. 

(9)       Stock Based Compensation
 
As of March 31, 2016, the Company had three active recognition and retention plans: the 2003 Recognition and Retention Plan (the "2003 RRP") with 1,250,000 authorized shares, the 2011 Restricted Stock Award Plan (the "2011 RSA") with 500,000 authorized shares, and the 2014 Equity Incentive Plan (the "2014 Plan") with 1,750,000 authorized shares. The 2003 RRP, the 2011 RSA, and the 2014 Plan are collectively referred to as the "Plans". The purpose of the Plans is to promote the long-term financial success of the Company and its subsidiaries by providing a means to attract, retain and reward individuals who contribute to such success and to further align their interests with those of the Company's stockholders.

Of the awarded shares, generally 50% vest ratably over three years with one-third of such shares vesting at each of the first, second, and third anniversary dates of the awards. These are referred to as "time-based shares". The remaining 50% of each award has a cliff vesting schedule and will vest three years after the award date based on the level of the Company's achievement of identified performance targets in comparison to the level of achievement of such identified performance targets by a defined peer group of financial institutions. These are referred to as "performance-based shares". The specific performance measure targets relate to return on assets, return on tangible equity, asset quality, and total shareholder return. Generally, if a participant leaves the Company prior to the third anniversary date of an award, any unvested shares are forfeited. Dividends declared with respect to shares awarded are held by the Company and paid to the participant only when the shares vest.

Under all the Plans, shares of the Company's common stock are reserved for issuance as restricted stock awards to officers, employees, and non-employee directors of the Company. Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company as treasury shares. Any shares not issued because vesting requirements are not met will be retired back to treasury and be made available again for issuance under the Plans.

During the three months ended March 31, 2016, and 2015, no shares were issued upon satisfaction of required conditions of the Plans.

Total expense for the Plans was $0.6 million and $0.4 million for the three months ended March 31, 2016 and 2015, respectively.


41

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

(10)               Earnings per Share
 
The following table sets forth a reconciliation of basic and diluted earnings per share (“EPS”) for the periods indicated:
 
 
Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
Basic
 
Fully
Diluted
 
Basic
 
Fully
Diluted
 
(In Thousands Except Share Data)
Numerator:
 

 
 

 
 

 
 

Net income
$
12,812

 
$
12,812

 
$
11,703

 
$
11,703

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Weighted average shares outstanding
70,186,921

 
70,186,921

 
70,036,090

 
70,036,090

Effect of dilutive securities

 
156,487

 

 
128,015

Adjusted weighted average shares outstanding
70,186,921

 
70,343,408

 
70,036,090

 
70,164,105

 
 
 
 
 
 
 
 
EPS
$
0.18

 
$
0.18

 
$
0.17

 
$
0.17

 
 
 
 
 
 
 
 

42

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

(11)       Fair Value of Financial Instruments
 
A description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring and non-recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. There were no changes in the valuation techniques used during the three months ended March 31, 2016 and March 31, 2015.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis
 
The following tables set forth the carrying value of assets and liabilities measured at fair value on a recurring basis at the dates indicated:
 
 
Carrying Value at March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In Thousands)
Assets:
 

 
 

 
 

 
 

Investment securities available-for-sale:
 

 
 

 
 

 
 

Debt securities:
 
 
 
 
 
 
 
GSEs
$

 
$
57,259

 
$

 
$
57,259

GSE CMOs

 
189,180

 

 
189,180

GSE MBSs

 
243,214

 

 
243,214

SBA commercial loan asset-backed securities

 
133

 

 
133

Corporate debt obligations

 
44,238

 

 
44,238

Trust preferred securities

 
1,165

 

 
1,165

Total debt securities

 
535,189

 

 
535,189

Marketable equity securities
993

 

 

 
993

Total investment securities available-for-sale
$
993

 
$
535,189

 
$

 
$
536,182

 
 
 
 
 
 
 
 
Interest-rate swaps
$

 
$
18,583

 
$

 
$
18,583

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Interest-rate swaps
$

 
$
18,583

 
$

 
$
18,583



43

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
Carrying Value at December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In Thousands)
Assets:
 

 
 

 
 

 
 

Investment securities available-for-sale:
 

 
 

 
 

 
 

Debt securities:
 
 
 
 
 
 
 
GSEs
$

 
$
40,627

 
$

 
$
40,627

GSE CMOs

 
193,816

 

 
193,816

GSE MBSs

 
229,881

 

 
229,881

SBA commercial loan asset-backed securities

 
147

 

 
147

Corporate debt obligations

 
46,486

 

 
46,486

Trust preferred securities

 
1,267

 

 
1,267

Total debt securities

 
512,224

 

 
512,224

Marketable equity securities
977

 

 

 
977

Total investment securities available-for-sale
$
977

 
$
512,224

 
$

 
$
513,201

 
 
 
 
 
 
 
 
Interest-rate swaps
$

 
$
8,656

 
$

 
$
8,656

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Interest-rate swaps
$

 
$
8,781

 
$

 
$
8,781


Investment Securities Available-for-Sale
 
The fair value of investment securities is based principally on market prices and dealer quotes received from third-party and nationally-recognized pricing services for identical investment securities such as U.S. Treasury and agency securities. The Company's marketable equity securities are priced this way and are included in Level 1. These prices are validated by comparing the primary pricing source with an alternative pricing source when available. When quoted market prices for identical securities are unavailable, the Company uses market prices provided by independent pricing services based on recent trading activity and other observable information, including but not limited to market interest-rate curves, referenced credit spreads, and estimated prepayment speeds where applicable. These investments include GSE debentures, GSE mortgage-related securities, SBA commercial loan asset backed securities, corporate debt securities, and trust preferred securities, all of which are included in Level 2. As of March 31, 2016 and December 31, 2015, no investment securities were valued using pricing models included in Level 3.

Additionally, Management reviews changes in fair value from period to period and performs testing to ensure that prices received from the third parties are consistent with Management's expectation of the market. Changes in the prices obtained from the pricing service are analyzed from month to month, taking into consideration changes in market conditions including changes in mortgage spreads, changes in U.S. Treasury security yields, and changes in generic pricing of 15-year and 30-year securities. Additional analysis may include a review of prices provided by other independent parties, a yield analysis, a review of average life changes using Bloomberg analytics and a review of historical pricing for a particular security.
 
Interest-Rate Swaps
 
The fair values for the interest-rate swap assets and liabilities represent a Level 2 valuation and are based on settlement values adjusted for credit risks associated with the counterparties and the Company and observable market interest rate curves. Credit risk adjustments consider factors such as the likelihood of default by the Company and its counterparties, its net exposures, and remaining contractual life. To date, the Company has not realized any losses due to a counterparty’s inability to pay any net uncollateralized position. See also Note 8, “Derivatives and Hedging Activities.”

 

44

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during the three months ended, March 31, 2016 and 2015.
 
Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis
 
The table below summarizes assets and liabilities measured at fair value on a non-recurring basis at the dates indicated:
 
 
Carrying Value at March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In Thousands)
Assets measured at fair value on a non-recurring basis:
 

 
 

 
 

 
 

Collateral-dependent impaired loans and leases
$

 
$

 
$
22,526

 
$
22,526

OREO

 

 
408

 
408

Repossessed assets

 
157

 

 
157

Total assets measured at fair value on a non-recurring basis
$

 
$
157

 
$
22,934

 
$
23,091

 
 
Carrying Value at December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In Thousands)
Assets measured at fair value on a non-recurring basis:
 

 
 

 
 

 
 

Collateral-dependent impaired loans and leases
$

 
$

 
$
12,137

 
$
12,137

OREO

 

 
729

 
729

Repossessed assets

 
614

 

 
614

Total assets measured at fair value on a non-recurring basis
$

 
$
614

 
$
12,866

 
$
13,480

 
Collateral-Dependent Impaired Loans and Leases
 
For nonperforming loans and leases where the credit quality of the borrower has deteriorated significantly, fair values of the underlying collateral were estimated using purchase and sales agreements (Level 2), comparable sales, or recent appraisals (Level 3), adjusted for selling costs and other expenses.
 
Other Real Estate Owned
 
The Company records OREO at the lower of cost or fair value. In estimating fair value, the Company utilizes purchase and sales agreements (Level 2) or comparable sales, recent appraisals or cash flows discounted at an interest rate commensurate with the risk associated with these cash flows (Level 3), adjusted for selling costs and other expenses.
 
Repossessed Assets
 
Repossessed assets are carried at estimated fair value less costs to sell based on auction pricing (Level 2).


45

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

The table below presents quantitative information about significant unobservable inputs (Level 3) for assets measured at fair value on a recurring and non-recurring basis at the dates indicated.

 
Fair Value
 
Valuation Technique
 
At March 31, 2016
 
At December 31, 2015
 
 
 
(Dollars in Thousands)
 
 
Collateral-dependent impaired loans and leases
$
22,526

 
$
12,137

 
Appraisal of collateral (1)
Other real estate owned
$
408

 
$
729

 
Appraisal of collateral (1)

(1) Fair value is generally determined through independent appraisals of the underlying collateral. The Company may also use another available source of collateral assessment to determine a reasonable estimate of the fair value of the collateral. Appraisals may be adjusted by Management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments may vary.

Summary of Estimated Fair Values of Financial Instruments

The following table presents the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at the dates indicated. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, FHLBB and FRB stock, and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits, short-term borrowings, and accrued interest payable.

46

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

 
 
 
 
 
 
Fair Value Measurements
 
Carrying
Value
 
Estimated
Fair Value
 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
(In Thousands)
At March 31, 2016
 

 
 

 
 

 
 

 
 

Financial assets:
 

 
 

 
 

 
 

 
 

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
 
GSEs
$
25,420

 
$
25,531

 
$

 
$
25,531

 
$

GSE MBSs
18,539

 
18,508

 

 
18,508

 

Municipal Obligations
38,950

 
39,767

 

 
39,767

 

Foreign Government Obligations
500

 
484

 

 

 
484

Loans held-for-sale
3,190

 
3,190

 

 
3,190

 

Loans and leases, net
5,071,839

 
5,058,809

 

 

 
5,058,809

Financial liabilities:
 
 
 

 
 

 
 

 
 

Certificates of deposit
1,108,150

 
1,115,355

 

 
1,115,355

 

Borrowed funds
1,028,309

 
1,036,227

 

 
1,036,227

 

 
 
 
 
 
 
 
 
 
 
At December 31, 2015
 

 
 

 
 

 
 

 
 

Financial assets:
 

 
 

 
 

 
 

 
 

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
 
GSE
$
34,915

 
$
34,819

 
$

 
$
34,819

 
$

GSE MBSs
19,291

 
18,986

 

 
18,986

 

Municipal Obligations
39,051

 
39,390

 

 
39,390

 

Foreign Government Obligations
500

 
500

 

 

 
500

Loans held-for-sale
13,383

 
13,383

 

 
13,383

 

Loans and leases, net
4,938,801

 
4,857,060

 

 

 
4,857,060

Financial liabilities:
 

 
 

 
 

 
 

 
 

Certificates of deposit
1,087,872

 
1,091,906

 

 
1,091,906

 

Borrowed funds
983,029

 
981,349

 

 
981,349

 

 
Investment Securities Held-to-Maturity
 
The fair values of certain investment securities held-to-maturity are estimated using market prices provided by independent pricing services based on recent trading activity and other observable information, including but not limited to market interest-rate curves, referenced credit spreads, and estimated prepayment speeds, where applicable. These investments include GSE debentures, GSE MBSs, and municipal obligations, all of which are included in Level 2. Additionally, fair values of foreign government obligations are based on comparisons to market prices of similar securities and are considered to be Level 3.
 
Loans Held-for-Sale
 
Fair value is measured using quoted market prices when available. These assets are typically categorized as Level 1. If quoted market prices are not available, comparable market values may be utilized. These assets are typically categorized as Level 2.

Loans and Leases
 
The fair values of performing loans and leases are estimated by segregating the portfolio into its primary loan and lease categories—commercial real estate mortgage, multi-family mortgage, construction, commercial, equipment financing,

47

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

condominium association, indirect automobile, residential mortgage, home equity and other consumer. These categories were further disaggregated based on significant financial characteristics such as type of interest rate (fixed / variable) and payment status (current / past-due). The Company discounts the contractual cash flows for each loan category using interest rates currently being offered for loans with similar terms to borrowers of similar quality and incorporates estimates of future loan prepayments. This method of estimating fair value does not incorporate the exit price concept of fair value.
 
Deposits
 
The fair values of deposit liabilities with no stated maturity (demand, NOW, savings and money market savings accounts) are equal to the carrying amounts payable on demand. The fair value of certificates of deposit represents contractual cash flows discounted using interest rates currently offered on deposits with similar characteristics and remaining maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the Company’s core deposit relationships (deposit-based intangibles).
 
Borrowed Funds
 
The fair value of federal funds purchased is equal to the amount borrowed. The fair value of FHLBB advances and repurchase agreements represents contractual repayments discounted using interest rates currently available for borrowings with similar characteristics and remaining maturities. The fair values reported for retail repurchase agreements are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on borrowings with similar characteristics and maturities. The fair values reported for subordinated deferrable interest debentures are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on instruments with similar terms and maturities.
 
(12)       Commitments and Contingencies
 
Off-Balance-Sheet Financial Instruments
 
The Company is party to off-balance-sheet financial instruments in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby and commercial letters of credit, and interest-rate swaps. According to GAAP, these financial instruments are not recorded in the financial statements until they are funded or related fees are incurred or received.
 
The contract amounts reflect the extent of the involvement the Company has in particular classes of these instruments. Such commitments involve, to varying degrees, elements of credit risk and interest-rate risk in excess of the amount recognized in the consolidated balance sheet. The Company’s exposure to credit loss in the event of non-performance by a counterparty is represented by the contractual amount of the instruments. The Company uses the same policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.


48

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

Financial instruments with off-balance-sheet risk at the dates indicated follow:
 
At March 31, 2016
 
At December 31, 2015
 
(In Thousands)
Financial instruments whose contract amounts represent credit risk:
 

 
 

Commitments to originate loans and leases:
 

 
 

Commercial real estate
$
18,865

 
$
36,000

Commercial
74,620

 
78,017

Residential mortgage
15,364

 
19,430

Unadvanced portion of loans and leases
643,148

 
648,291

Unused lines of credit:
 

 
 

Home equity
306,284

 
280,786

Other consumer
12,895

 
12,383

Other commercial
117

 
529

Unused letters of credit:
 

 
 

Financial standby letters of credit
12,123

 
12,389

Performance standby letters of credit
622

 
392

Commercial and similar letters of credit
878

 
821

Back-to-back interest-rate swaps (Notional principal amounts)
583,035

 
490,632

 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee by the customer. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if any, is based on Management’s credit evaluation of the borrower.
 
Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee performance of a customer to a third party. These standby and commercial letters of credit are primarily issued to support the financing needs of the Company’s commercial customers. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
The liability for unfunded credit commitments, which is included in other liabilities, was $1.4 million at March 31, 2016 and $1.3 million at December 31, 2015.
From time to time, the Company enters into back-to-back interest rate swaps with commercial customers and third-party financial institutions. These swaps allow the Company to offer long-term fixed-rate commercial loans while mitigating the interest-rate risk of holding those loans. In a back-to-back interest rate swap transaction, the Company lends to a commercial customer on a floating-rate basis and then enters into an interest rate swap with that customer. Concurrently, the Company enters into an offsetting swap with a third-party financial institution, effectively minimizing its net interest-rate risk exposure resulting from such transactions.
The fair value of interest rate swap assets and liabilities was $18.6 million and $18.6 million, respectively, at March 31, 2016. The fair value of interest rate swap assets and liabilities was $8.7 million and $8.8 million, respectively, at December 31, 2015.
Lease Commitments
 The Company leases certain office space under various noncancellable operating leases. These leases have original terms ranging from 5 years to over 25 years. Certain leases contain renewal options and escalation clauses which can increase rental expenses based principally on the consumer price index and fair market rental value provisions.


49

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Three Months Ended March 31, 2016 and 2015

A summary of future minimum rental payments under such leases at the dates indicated follows:
 
Minimum Rental Payments
 
(In Thousands)
 
 

Remainder of 2016
$
3,663

Year ending:
 
2017
4,472

2018
4,071

2019
3,220

2020
2,664

Thereafter
13,521

Total
$
31,611

 
The leases contain escalation clauses for real estate taxes and other expenditures. Total rental expense was $1.3 million and $1.2 million during the three months ended March 31, 2016 and 2015.
 
Legal Proceedings
 
There are various outstanding legal proceedings in the normal course of business. In the opinion of Management, after consulting with legal counsel, the consolidated financial position and results of operations of the Company are not expected to be affected by the outcome of such proceedings.

50


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
 
Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. These statements, which are based on certain assumptions and describe Brookline Bancorp, Inc.’s (the “Company’s”) future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These statements include, among others, statements regarding the Company’s intent, belief or expectations with respect to economic conditions, trends affecting the Company’s financial condition or results of operations, and the Company’s exposure to market, liquidity, interest-rate and credit risk.
 
Forward-looking statements are based on the current assumptions underlying the statements and other information with respect to the beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions of Management and the financial condition, results of operations, future performance and business are only expectations of future results. Although the Company believes that the expectations reflected in the Company’s forward-looking statements are reasonable, the Company’s actual results could differ materially from those projected in the forward-looking statements as a result of, among other factors, adverse conditions in the capital and debt markets; changes in interest rates; competitive pressures from other financial institutions; the effects of weakness in general economic conditions on a national basis or in the local markets in which the Company operates, including changes which adversely affect borrowers’ ability to service and repay their loans and leases; changes in the value of securities and other assets in the Company’s investment portfolio; changes in loan and lease default and charge-off rates; the adequacy of allowances for loan and lease losses; deposit levels necessitating increased borrowing to fund loans and investments; changes in government regulation; the risk that goodwill and intangibles recorded in the Company’s financial statements will become impaired; and changes in assumptions used in making such forward-looking statements, as well as the other risks and uncertainties detailed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and other filings submitted to the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.
 
Introduction
 
The Company, a Delaware corporation, operates as a multi-bank holding company for Brookline Bank and its subsidiaries; Bank Rhode Island (“BankRI”) and its subsidiaries; First Ipswich Bank (“First Ipswich”) and its subsidiaries; and Brookline Securities Corp.
 
As a commercially-focused financial institution with 49 full-service banking offices throughout greater Boston, the north shore of Massachusetts and Rhode Island, the Company, through Brookline Bank, BankRI and First Ipswich (the “Banks”), offers a wide range of commercial, business and retail banking services, including a full complement of cash management products, on-line and mobile banking services, consumer and residential loans, and investment services, designed to meet the financial needs of small to mid-sized businesses and individuals throughout central New England. Specialty lending activities include equipment financing primarily in the New York and New Jersey metropolitan area.
 
The Company focuses its business efforts on profitably growing its commercial lending businesses, both organically, and through acquisitions. The Company’s customer focus, multi-bank structure, and risk management are integral to its organic growth strategy and serve to differentiate the Company from its competitors. As full-service financial institutions, the Banks and their subsidiaries focus on the continued acquisition of well-qualified customers, the deepening of long-term banking relationships through a full complement of products, excellent customer service, and strong risk management.

The Company manages the Banks under uniform strategic objectives, with one set of uniform policies consistently applied by one executive management team. Within this environment, the Company believes that the ability to make customer decisions locally enhances Management's motivation, service levels and, as a consequence, the Company's financial results. As such, while most back-office functions are consolidated at the holding company level, branding and decision-making, including credit decisioning and pricing, remain largely local in order to better meet the needs of bank customers and further motivate the Banks’ commercial, business and retail bankers.


51


The Company and the Banks are supervised, examined and regulated by the Board of Governors of the Federal Reserve System (“FRB”). As a Massachusetts-chartered savings bank and trust company, respectively, Brookline Bank and First Ipswich are also subject to regulation under the laws of the Commonwealth of Massachusetts and the jurisdiction of the Massachusetts Division of Banks. As a Rhode Island-chartered financial institution, BankRI is also subject to regulation under the laws of the State of Rhode Island and the jurisdiction of the Banking Division of the Rhode Island Department of Business Regulation. The Federal Deposit Insurance Corporation ("FDIC") continues to insure each of the Banks’ deposits up to $250,000 per depositor. Additionally, as a Massachusetts-chartered savings bank, Brookline Bank is also insured by the Depositors Insurance Fund (“DIF”), a private industry-sponsored company. The DIF insures savings bank deposits in excess of the FDIC insurance limits. As such, Brookline Bank offers 100% insurance on all deposits as a result of a combination of insurance from the FDIC and the DIF.
 
The Company’s common stock is traded on the Nasdaq Global Select MarketSM under the symbol “BRKL.”
 

52


Selected Financial Data

The following is based in part on, and should be read in conjunction with, the consolidated financial statements and accompanying notes, and other information appearing elsewhere in this Form 10-Q.
 
At and for the Three Months Ended
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2016
 
2015
 
2015
 
2015
 
2015
 
(Dollars in Thousands, Except Per Share Data)
PER COMMON SHARE DATA
 
 

 
 

 
 

 
 

Earnings per share — Basic
$
0.18

 
$
0.19

 
$
0.18

 
$
0.17

 
$
0.17

Book value per share (end of period)
9.69

 
9.51

 
9.45

 
9.33

 
9.30

Tangible book value per share (end of period) (1)
7.59

 
7.39

 
7.33

 
7.19

 
7.15

Dividends paid per common share
0.090

 
0.090

 
0.090

 
0.090

 
0.085

Stock price (end of period)
11.01

 
11.50

 
10.14

 
11.29

 
10.05

 
 
 
 
 
 
 
 
 
 
PERFORMANCE RATIOS (2)
 
 

 
 

 
 

 
 

Net interest margin (taxable equivalent basis)
3.45
%
 
3.54
%
 
3.54
%
 
3.49
%
 
3.57
%
Return on average assets
0.84
%
 
0.89
%
 
0.89
%
 
0.82
%
 
0.80
%
Return on average tangible assets (1)
0.86
%
 
0.92
%
 
0.91
%
 
0.85
%
 
0.82
%
Return on average stockholders’ equity
7.57
%
 
7.99
%
 
7.81
%
 
7.24
%
 
7.22
%
Return on average tangible stockholders' equity (1)
9.69
%
 
10.28
%
 
10.11
%
 
9.40
%
 
9.41
%
Dividend payout ratio (1)
49.45
%
 
47.54
%
 
49.13
%
 
53.32
%
 
51.05
%
Efficiency ratio (3)
57.57
%
 
57.59
%
 
58.59
%
 
58.52
%
 
59.11
%
 
 
 
 
 
 
 
 
 
 
ASSET QUALITY RATIOS
 
 
 
 
 
 
 
 
Net loan and lease charge-offs as a percentage of average loans and leases (annualized)
0.03
%
 
0.11
%
 
0.13
%
 
0.04
%
 
0.07
%
Nonperforming loans and leases as a percentage of total loans and leases
0.62
%
 
0.39
%
 
0.41
%
 
0.50
%
 
0.49
%
Nonperforming assets as a percentage of total assets
0.53
%
 
0.34
%
 
0.36
%
 
0.45
%
 
0.43
%
Allowance for loan and lease losses as a percentage of total loans and leases
1.14
%
 
1.14
%
 
1.17
%
 
1.19
%
 
1.19
%
Allowance for loan and lease losses related to originated loans and leases as a percentage of originated loans and leases (1)
1.20
%
 
1.20
%
 
1.25
%
 
1.27
%
 
1.28
%
 
 
 
 
 
 
 
 
 
 
CAPITAL RATIOS
 
 
 
 
 
 
 
 
 
Stockholders’ equity to total assets
11.01
%
 
11.05
%
 
11.36
%
 
11.30
%
 
11.32
%
Tangible equity ratio (1)
8.83
%
 
8.81
%
 
9.04
%
 
8.94
%
 
8.93
%
 
 
 
 
 
 
 
 
 
 
FINANCIAL CONDITION DATA
 
 
 
 
 
 
 
 
Total assets
$
6,181,030

 
$
6,042,338

 
$
5,839,529

 
$
5,782,934

 
$
5,755,146

Total loans and leases
5,130,445

 
4,995,540

 
4,829,152

 
4,729,581

 
4,634,594

Allowance for loan and lease losses
58,606

 
56,739

 
56,472

 
56,398

 
55,106

Goodwill and identified intangible assets
147,888

 
148,523

 
149,247

 
149,972

 
150,696

Total deposits
4,393,456

 
4,306,018

 
4,144,577

 
4,129,408

 
4,114,795

Total borrowed funds
1,028,309

 
983,029

 
960,220

 
937,648

 
924,925

Stockholders’ equity
680,417

 
667,485

 
663,468

 
653,516

 
651,319

 
 
 
 
 
 
 
 
 
 
EARNINGS DATA
 
 
 

 
 

 
 

 
 

Net interest income
$
49,203

 
$
50,078

 
$
48,587

 
$
47,172

 
$
48,528

Provision for credit losses
2,378

 
1,520

 
1,755

 
1,913

 
2,263

Non-interest income
6,469

 
6,063

 
4,784

 
4,867

 
4,470

Non-interest expense
32,053

 
32,329

 
31,270

 
30,452

 
31,326

Net income
12,812

 
13,327

 
12,888

 
11,865

 
11,703


(1)
Refer to "Non-GAAP Financial Measures and Reconciliations to GAAP".
(2)
All performance ratios are annualized and are based on average balance sheet amounts, where applicable.
(3)
Efficiency ratio is calculated by dividing non-interest expense by the sum of non-interest income and net interest income.

53


Executive Overview
 
Growth
 
Total assets of $6.2 billion at March 31, 2016 increased $138.7 million, or 9.2% on an annualized basis, from December 31, 2015. The increase was primarily driven by an increase in loans and leases.

Total loans and leases of $5.1 billion at March 31, 2016 increased $134.9 million, or 10.8% on an annualized basis, from $5.0 billion at December 31, 2015. The Company’s commercial loan portfolios, which are comprised of commercial real estate loans and commercial loans and leases, totaled $4.2 billion, or 81.2% of total loans and leases, at March 31, 2016, an increase of $126.3 million, or 12.5% on an annualized basis, from $4.0 billion, or 80.9% of total loans and leases, at December 31, 2015. The $126.3 million increase in the commercial loan portfolios was partially offset by the $2.5 million decrease in the indirect automobile portfolio due to the sale during the first quarter of 2015.
 
Total deposits of $4.4 billion at March 31, 2016 increased $87.4 million from December 31, 2015. Core deposits, defined as the sum of demand checking, NOW, money market, and savings accounts, increased at a 8.3% annualized rate during the first three months of 2016.

Asset Quality

The ratio of the allowance for loan and lease losses to total loans and leases was 1.14% at March 31, 2016 and December 31, 2015. The allowance for loan and lease losses related to originated loans and leases as a percentage of total originated loans and leases was 1.20% at March 31, 2016 and December 31, 2015. The Company continued to employ its historical underwriting methodology throughout the three-month period ended March 31, 2016.
 
Nonperforming assets at March 31, 2016 totaled $32.5 million, or 0.53% of total assets, as compared with $20.7 million, or 0.34% of total assets, at December 31, 2015. Net charge-offs for the three months ended March 31, 2016 were $0.4 million, or 0.03% of average loans and leases on an annualized basis, compared to $0.9 million, or 0.07% annualized, for the three months ended March 31, 2015.
 
Capital Strength

The Company is a "well-capitalized" bank holding company as defined in the Federal Reserve Board's Regulation Y. The Company's common equity Tier 1 capital ratio was 10.47% at March 31, 2016, compared to 10.62% at December 31, 2015. The Company’s Tier 1 leverage ratio was 9.27% at March 31, 2016, compared to 9.37% at December 31, 2015. Tier 1 risk-based ratio was 10.77% at March 31, 2016, compared to 10.91% at December 31, 2015. Total risk-based ratio was 13.38% at March 31, 2016, compared to 13.54% at December 31, 2015. The Company's ratio of stockholders’ equity to total assets was 11.01% and 11.05% at March 31, 2016 and December 31, 2015, respectively. The Company's tangible equity ratio was 8.83% and 8.81% at March 31, 2016 and December 31, 2015, respectively.
 
Net Income

For the three months ended March 31, 2016, the Company reported net income of $12.8 million, or $0.18 per basic and diluted share, up $1.1 million, or 9.5%, from $11.7 million, or $0.17 per basic share, for the three months ended March 31, 2015. This net increase in net income is primarily the result of an increase in net interest income of $0.7 million, an increase in the provision for credit losses of $0.1 million, an increase in non-interest income of $2.0 million, an increase in non-interest expense of $0.7 million, an increase in provision for income taxes of $0.5 million and an increase in noncontrolling income of $0.2 million. Refer to “Results of Operations" below for further discussion.

The annualized return on average assets was 0.84% for the three months ended March 31, 2016, compared to 0.80% for the three months ended March 31, 2015, respectively. The annualized return on average stockholders’ equity was 7.57% for the three months ended March 31, 2016, compared to 7.22% for the three months ended March 31, 2015.

Net interest margin was 3.45% for the three months ended March 31, 2016, compared to 3.57% for the three months ended March 31, 2015. The decrease in the net interest margin in a highly competitive and declining interest rate environment is, in part, a result of a decrease in the yield on interest-earning assets by 8 basis points to 4.03% for the three months ended March 31, 2016 from 4.11% for the three months ended March 31, 2015 and an increase of 3 basis points in interest-bearing liabilities to 0.77% for the three months ended March 31, 2016 from 0.74% for the three months ended March 31, 2015.


54


The Company's net interest margin and net interest income continued to be placed under significant pressure due to competitive pricing in all loan categories and the continuation of a low interest-rate environment, along with the Company's diminishing ability to reduce its cost of funds.

Critical Accounting Policies
 
The SEC defines “critical accounting policies” as those involving significant judgments and difficult or complex assumptions by Management, often as a result of the need to make estimates about matters that are inherently uncertain or variable, which have, or could have, a material impact on the carrying value of certain assets or net income. The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. As discussed in the Company’s 2015 Annual Report on Form 10-K, Management has identified the valuation of available-for-sale securities, accounting for assets and liabilities acquired, the determination of the allowance for loan and lease losses, the review of goodwill and intangibles for impairment, and income tax accounting as the Company’s most critical accounting policies.
 

55


Non-GAAP Financial Measures and Reconciliations to GAAP
 
In addition to evaluating the Company’s results of operations in accordance with GAAP, Management periodically supplements this evaluation with an analysis of certain non-GAAP financial measures, such as the return on tangible assets or equity, the tangible equity ratio, tangible book value per share, dividend payout ratio and the ratio of the allowance for loan and lease losses related to originated loans and leases as a percentage of originated loans and leases. Management believes that these non-GAAP financial measures provide information useful to investors in understanding the Company’s underlying operating performance and trends, and facilitates comparisons with the performance assessment of financial performance, including non-interest expense control, while the tangible equity ratio and tangible book value per share are used to analyze the relative strength of the Company’s capital position.
 
 
 
 
 
 
The following table summarizes the Company’s return on average tangible assets and return on average tangible stockholders’ equity:
 
 
Three Months Ended
 
March 31,
2016

December 31,
2015

September 30,
2015

June 30,
2015

March 31,
2015
 
(Dollars in Thousands)
Net income, as reported
$
12,812

 
$
13,327

 
$
12,888

 
$
11,865

 
$
11,703

 
 
 
 
 
 
 
 
 
 
Average total assets
$
6,092,858

 
$
5,957,191

 
$
5,790,469

 
5,762,620

 
5,852,114

Less: Average goodwill and average identified intangible assets, net
148,248

 
148,930

 
149,669

 
150,385

 
151,125

Average tangible assets
$
5,944,610


$
5,808,261


$
5,640,800


$
5,612,235


$
5,700,989

 
 
 
 
 
 
 
 
 
 
Return on average tangible assets (annualized)
0.86
%
 
0.92
%
 
0.91
%
 
0.85
%
 
0.82
%
 
 
 
 
 
 
 
 
 
 
Average total stockholders’ equity
$
677,101

 
$
667,471

 
$
659,761

 
655,223

 
648,683

Less: Average goodwill and average identified intangible assets, net
148,248

 
148,930

 
149,669

 
150,385

 
151,125

Average tangible stockholders’ equity
$
528,853

 
$
518,541

 
$
510,092

 
$
504,838

 
$
497,558

 
 
 
 
 
 
 
 
 
 
Return on average tangible stockholders’ equity (annualized)
9.69
%
 
10.28
%
 
10.11
%
 
9.40
%
 
9.41
%
 
The following tables summarize the Company’s tangible equity ratio at the dates indicated:
 
 
Three Months Ended
 
March 31,
2016

December 31,
2015
 
September 30,
2015

June 30,
2015

March 31,
2015
 
(Dollars in Thousands)
Total stockholders’ equity
$
680,417

 
$
667,485

 
$
663,468

 
$
653,516

 
$
651,319

Less: Goodwill and identified intangible assets, net
147,888

 
148,523

 
149,247

 
149,972

 
150,696

Tangible stockholders’ equity
$
532,529


$
518,962


$
514,221


$
503,544


$
500,623

 
 
 
 
 
 
 
 
 
 
Total assets
$
6,181,030

 
$
6,042,338

 
$
5,839,529

 
$
5,782,934

 
$
5,755,146

Less: Goodwill and identified intangible assets, net
147,888

 
148,523

 
149,247

 
149,972

 
150,696

Tangible assets
$
6,033,142


$
5,893,815


$
5,690,282

 
$
5,632,962

 
$
5,604,450

 
 
 
 
 
 
 
 
 
 
Tangible equity ratio
8.83
%
 
8.81
%
 
9.04
%
 
8.94
%
 
8.93
%

56



The following tables summarize the Company’s tangible book value per share at the dates indicated:
 
 
Three Months Ended
 
March 31,
2016

December 31,
2015
 
September 30,
2015

June 30,
2015

March 31,
2015
 
(Dollars In Thousands, Except Share Data)
Tangible stockholders’ equity
$
532,529

 
$
518,962

 
$
514,221

 
$
503,544

 
$
500,623

 
 
 
 
 
 
 
 
 
 
Common shares issued
75,744,445

 
75,744,445

 
75,744,445

 
75,744,445

 
75,744,445

Less: Common shares classified as treasury shares
4,861,554

 
4,861,554

 
4,861,085

 
5,048,525

 
5,042,238

Less: Unallocated ESOP shares
203,973

 
213,066

 
222,645

 
232,224

 
241,803

Less: Unvested restricted shares
486,035

 
486,035

 
486,999

 
406,566

 
418,035

Common shares outstanding
70,192,883

 
70,183,790

 
70,173,716

 
70,057,130

 
70,042,369

 
 
 
 
 
 
 
 
 
 
Tangible book value per share
$
7.59

 
$
7.39

 
$
7.33

 
$
7.19

 
$
7.15


The following table summarizes the Company’s dividend payout ratio:
 
 
Three Months Ended
 
March 31,
2016

December 31,
2015
 
September 30,
2015

June 30,
2015

March 31,
2015
 
(Dollars in Thousands)
Dividends paid
$
6,336

 
$
6,335

 
$
6,332

 
$
6,326

 
$
5,974

 
 
 
 
 
 
 
 
 
 
Net income, as reported
$
12,812

 
$
13,327

 
$
12,888

 
$
11,865

 
$
11,703

 
 
 
 
 
 
 
 
 
 
Dividend payout ratio
49.45
%
 
47.54
%
 
49.13
%
 
53.32
%
 
51.05
%
 
The following table summarizes the Company’s allowance for loan and lease losses related to originated loans and leases as a percentage of total originated loans and lease at the dates indicated:
 
 
Three Months Ended
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
 
June 30,
2015
 
March 31,
2015
 
(Dollars in Thousands)
Allowance for loan and lease losses
$
58,606

 
$
56,739

 
$
56,472

 
$
56,398

 
$
55,106

Less: Allowance for acquired loan and lease losses
1,938

 
1,752

 
2,048

 
2,655

 
2,911

Allowance for originated loan and lease losses
$
56,668

 
$
54,987

 
$
54,424

 
$
53,743

 
$
52,195

 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
5,130,445

 
$
4,995,540

 
$
4,829,152

 
$
4,729,581

 
$
4,634,594

Less: Total acquired loans and leases
395,782

 
422,652

 
457,922

 
509,028

 
561,103

Total originated loans and leases
$
4,734,663

 
$
4,572,888

 
$
4,371,230

 
$
4,220,553

 
$
4,073,491

 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses related to originated loans and leases as a percentage of originated loans and leases
1.20
%

1.20
%

1.25
%

1.27
%

1.28
%


57


Financial Condition 


Loans and Leases

The following table summarizes the Company’s portfolio of loans and leases receivable at the dates indicated:
 
 
At March 31, 2016
 
At December 31, 2015
 
Balance
 
Percent
 of Total
 
Balance
 
Percent
 of Total
 
(Dollars in Thousands)
Commercial real estate loans:
 

 
 

 
 

 
 

Commercial real estate mortgage
$
1,958,057

 
38.2
%
 
$
1,875,592

 
37.5
%
Multi-family mortgage
682,317

 
13.3
%
 
658,480

 
13.2
%
Construction
126,024

 
2.5
%
 
130,322

 
2.6
%
Total commercial real estate loans
2,766,398

 
54.0
%
 
2,664,394

 
53.3
%
Commercial loans and leases:
 

 
 

 
 

 
 

Commercial
616,290

 
12.0
%
 
592,531

 
11.9
%
Equipment financing
721,621

 
14.1
%
 
721,890

 
14.5
%
Condominium association
60,728

 
1.2
%
 
59,875

 
1.2
%
Total commercial loans and leases
1,398,639

 
27.3
%
 
1,374,296

 
27.6
%
Indirect automobile
11,220

 
0.2
%
 
13,678

 
0.3
%
Consumer loans:
 

 
 

 
 

 
 

Residential mortgage
617,501

 
12.0
%
 
616,449

 
12.3
%
Home equity
318,859

 
6.2
%
 
314,553

 
6.3
%
Other consumer
17,828

 
0.3
%
 
12,170

 
0.2
%
Total consumer loans
954,188

 
18.5
%
 
943,172

 
18.8
%
Total loans and leases
5,130,445

 
100.0
%
 
4,995,540

 
100.0
%
Allowance for loan and lease losses
(58,606
)
 
 

 
(56,739
)
 
 

Net loans and leases
$
5,071,839

 
 

 
$
4,938,801

 
 

 
The following table sets forth the growth (decline) in the Company’s loan and lease portfolios during the three months ended March 31, 2016:
 
 
At March 31,
2016
 
At December 31,
2015
 
Dollar Change
 
Percent Change
(Annualized)
 
(Dollars in Thousands)
Commercial real estate
$
2,766,398

 
$
2,664,394

 
$
102,004

 
15.3
 %
Commercial
1,398,639

 
1,374,296

 
24,343

 
7.1
 %
Indirect automobile
11,220

 
13,678

 
(2,458
)
 
-71.9
 %
Consumer
954,188

 
943,172

 
11,016

 
4.7
 %
Total loans and leases
$
5,130,445

 
$
4,995,540

 
$
134,905

 
10.8
 %


The Company’s loan portfolio consists primarily of first mortgage loans secured by commercial, multi-family and residential real estate properties located in the Company’s primary lending area, loans to business entities, including commercial lines of credit, loans to condominium associations, and loans and leases used to finance equipment used by small businesses. The Company also provides financing for construction and development projects, home equity and other consumer loans.


58


The Company employs seasoned commercial lenders and retail bankers who rely on community and business contacts as well as referrals from customers, attorneys, and other professionals to generate loans and deposits. Existing borrowers are also an important source of business since many of them have more than one loan outstanding with the Company. The Company’s ability to originate loans depends on the strength of the economy, trends in interest rates, and levels of customer demand, and market competition.
The Company's current policy is that the aggregate amount of loans outstanding to any one borrower or related entities may not exceed $35 million unless approved by the Board Credit Committee, a committee of the Company's Board of Directors.
As of March 31, 2016, there were two borrowers with aggregated loans outstanding of $35 million or greater. The total of those loans was $94.3 million or 1.84% of total loans outstanding as of March 31, 2016.
The Company has written underwriting policies to control the inherent risks in loan origination. 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.
Commercial Real Estate Loans
 
The commercial real estate portfolio is composed of commercial real estate loans, multi-family mortgage loans, and construction loans and is the largest component of the Company’s overall loan portfolio, representing 54.0% of total loans and leases outstanding at March 31, 2016.
 
Typically, commercial real estate loans are larger in size and involve a greater degree of risk than owner-occupied residential mortgage loans. Loan repayment is usually dependent on the successful operation and management of the properties and the value of the properties securing the loans. Economic conditions can greatly affect cash flows and property values.
 
A number of factors are considered in originating commercial real estate and multi-family mortgage loans. The qualifications and financial condition of the borrower (including credit history), as well as the potential income generation and 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 cash flow before debt service to debt service), the use of conservative capitalization rates, and the ratio of the loan amount to the appraised value. Generally, personal guarantees are obtained from commercial real estate loan borrowers.
 
Commercial real estate and multi-family mortgage loans are typically originated for terms of five years with amortization periods of 20 to 30 years. Many of the loans are priced at inception on a fixed-rate basis generally for periods ranging from two to five years with repricing periods for longer-term loans. When possible, prepayment penalties are included in loan covenants on these loans. For commercial customers who are interested in loans with terms longer than five years, the Company offers interest rate swaps to accommodate customer preferences.
 
The Company's urban and suburban market area is characterized by a large number of apartment buildings, condominiums and office buildings. As a result, multi-family and commercial real estate mortgage lending has been a significant part of the Company's activities for many years. These types of loans typically generate higher yields, but also involve greater credit risk. Many of the Company's borrowers have more than one multi-family or commercial real estate loan outstanding with the Company.
 
The commercial real estate portfolio was composed primarily of loans secured by apartment buildings ($687.5 million), office buildings ($624.4 million), retail stores ($522.0 million), industrial properties ($306.0 million), and mixed-use properties ($212.3 million) at March 31, 2016. At that date, over 97% of the commercial real estate loans outstanding were secured by properties located in New England.
 
Construction and development financing is generally considered to involve a higher degree of risk than long-term financing on improved, occupied real estate, and thus has higher concentration limits than do other commercial credit classes. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of construction costs, the estimated time to sell or rent the completed property at an adequate price or rate of occupancy, and market conditions. If the estimates and projections prove to be inaccurate, the Company may be confronted with a project which, upon completion, has a value that is insufficient to assure full loan repayment.

59


 
Criteria applied in underwriting construction loans for which the primary source of repayment is the sale of the property are different from the criteria applied in underwriting construction loans for which the primary source of repayment is the stabilized cash flow from the completed project. For those loans where the primary source of repayment is from resale of the property, in addition to the normal credit analysis performed for other loans, the Company also analyzes project costs, the attractiveness of the property in relation to the market in which it is located, and demand within the market area. For those construction loans where the source of repayment is the stabilized cash flow from the completed project, the Company analyzes not only project costs but also how long it might take to achieve satisfactory occupancy and the reasonableness of projected rental rates in relation to market rental rates.

Commercial Loans and Leases
 
The commercial loan and lease portfolio is composed of commercial loans, equipment financing loans and leases and condominium association loans and represented 27.3% of total loans outstanding at March 31, 2016.
 
The Company provides commercial banking services to companies in its market area. Approximately 51% of the commercial loans outstanding at March 31, 2016 were made to borrowers located in New England. Approximately 17% of the outstanding balances were made to borrowers in New York and New Jersey by the Company's equipment financing divisions. The remaining 49% of the commercial loans outstanding were made to borrowers in other areas in the United States of America. Product offerings include lines of credit, term loans, letters of credit, deposit services, and cash management. These types of credit facilities have as their primary source of repayment cash flows from the operations of a business. Interest rates offered are available on a floating basis tied to the prime rate or a similar index or on a fixed-rate basis referenced on the Federal Home Loan Bank of Boston (“FHLBB”) index.
 
Credit extensions are made to established businesses on the basis of loan purpose and assessment of capacity to repay as determined by an analysis of their financial statements, the nature of collateral to secure the credit extension and, in most instances, the personal guarantee of the owner of the business as well as industry and general economic conditions. The Company also participates in U.S. Government programs such as the Small Business Administration (“SBA”) in both the 7A program and as an SBA preferred lender.
 
The Company’s equipment financing divisions focus on market niches in which its lenders have deep experience and industry contacts, and on making loans to customers with business experience. An important part of the Company’s equipment financing loan origination volume comes from equipment manufacturers and existing customers as they expand their operations. The equipment financing portfolio is composed primarily of loans to finance laundry, tow trucks, fitness, dry
cleaning, and convenience store equipment. The borrowers are located primarily in the greater New York and New Jersey metropolitan area, although the customer base extends to locations throughout the United States. Typically, the loans are priced at a fixed rate of interest and require monthly payments over a three- to seven-year life. The yields earned on equipment financing loans are higher than those earned on the commercial loans made by the Banks because they involve a higher degree of credit risk. Equipment financing customers are typically small-business owners who operate with limited financial resources and who face greater risks when the economy weakens or unforeseen adverse events arise. Because of these characteristics, personal guarantees of borrowers are usually obtained along with liens on available assets. The size of loan is determined by an analysis of cash flow and other characteristics pertaining to the business and the equipment to be financed, based on detailed revenue and profitability data of similar operations.
 
Loans to condominium associations are for the purpose of funding capital improvements, are made for five- to ten-year terms and are secured by a general assignment of condominium association revenues. Among the factors considered in the underwriting of such loans are the level of owner occupancy, the financial condition and history of the condominium association, the attractiveness of the property in relation to the market in which it is located, and the reasonableness of estimates of the cost of capital improvements to be made. Depending on loan size, funds are advanced as capital improvements are made and, in more complex situations, after completion of engineering inspections.
 
Consumer Loans
 
The consumer loan portfolio is composed of residential mortgage loans, home equity loans and lines of credit and other consumer loans and represented 18.5% of total loans outstanding at March 31, 2016. The Company focuses its mortgage loans on existing and new customers within its branch networks in the urban and suburban marketplaces in the greater Boston and Providence metropolitan areas. Loans outstanding in the indirect automobile portfolio totaled $11.2 million at March 31, 2016, down from $13.7 million at December 31, 2015. In December 2014, the Company ceased the origination of indirect automobile loa

60


ns and in March 2015, sold $255.2 million of the indirect automobile loan portfolio. As of March 31, 2016, the Company continues to service the remaining portfolio.
 
The Company originates adjustable- and fixed-rate residential mortgage loans secured by one- to four-family residences. Each residential mortgage loan granted is subject to a satisfactorily completed application, employment verification, credit history, and a demonstrated ability to repay the debt. Generally, loans are not made when the loan-to-value ratio exceeds 80% unless private mortgage insurance is obtained and/or there is a financially strong guarantor. Appraisals are performed by outside independent fee appraisers.

In general, the Company maintains three-, five- and seven-year adjustable-rate mortgage loans and ten-year fixed-rate fully amortizing mortgage loans in its portfolio. Fixed-rate mortgage loans with maturities beyond ten years, such as 15- and 30-year fixed-rate mortgages, are generally not maintained in the Company’s portfolio but are, rather, sold into the secondary market on a servicing-released basis. At March 31, 2016, the Banks acted as correspondent banks in these secondary-market transactions. Loan sales in the secondary market provide funds for additional lending and other banking activities.
 
Underwriting guidelines for home equity loans and lines of credit are similar to those for residential mortgage loans. Home equity loans and lines of credit are limited to no more than 80% of the appraised value of the property securing the loan including the amount of any existing first mortgage liens.
 
Other consumer loans have historically been a modest part of the Company’s loan originations. At March 31, 2016, other consumer loans equaled $17.8 million, or 0.3% of total loan outstanding. Consumer equity and debt securities were pledged as collateral for a substantial part of these loans.

Asset Quality
 
Criticized and Classified Assets
 
The Company’s Management negatively rates certain loans and leases as “other asset especially mentioned ("OAEM"),” “substandard” or “doubtful” based on criteria established under banking regulations. These loans and leases are collectively referred to as “criticized” assets. Loans and leases rated OAEM have potential weaknesses that deserve Management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects of the loan or lease at some future date. Loans and leases rated as substandard are inadequately protected by the payment capacity of the obligor or of the collateral pledged, if any. Substandard loans and leases have a well-defined weakness or weaknesses that jeopardize the liquidation of debt and are characterized by the distinct possibility that the Company will sustain some loss if existing deficiencies are not corrected. At March 31, 2016, the Company had $61.9 million of total assets, including acquired assets, that were designated as criticized. This compares to $49.0 million of assets that were designated as criticized at December 31, 2015. The increase in criticized assets was primarily due to several criticized taxi medallion and equipment financing loans which were downgraded during the first quarter of 2016. See Note 5, “Allowance for Loan and Lease Losses,” to the unaudited consolidated financial statements for more information on the Company’s risk-rating system.
 
Nonperforming Assets
 
“Nonperforming assets” consist of nonperforming loans and leases, other real estate owned (“OREO”) and other repossessed assets. Under certain circumstances, the Company may restructure the terms of a loan or lease as a concession to a borrower, except for acquired loans and leases which are individually evaluated against expected performance on the date of acquisition. These restructured loans and leases are generally considered “nonperforming loans and leases” until a history of collection of at least six months on the restructured terms of the loan or lease has been established. OREO consists of real estate acquired through foreclosure proceedings and real estate acquired through acceptance of a deed in lieu of foreclosure. Other repossessed assets consist of assets that have been acquired through foreclosure that are not real estate and are included in other assets on the Company’s unaudited consolidated balance sheets.

61



The following table sets forth information regarding nonperforming assets at the dates indicated:
 
At March 31, 2016
 
At December 31, 2015
 
(Dollars in Thousands)
Nonaccrual loans and leases:
 

 
 

Commercial real estate mortgage
$
5,440

 
$
5,482

Multi-family mortgage
1,446

 
291

Commercial
15,050

 
6,264

Equipment financing
5,391

 
2,610

Indirect automobile
308

 
675

Residential mortgage
2,132

 
2,225

Home equity
2,104

 
1,757

Other consumer
34

 
29

Total nonaccrual loans and leases
31,905

 
19,333

OREO
408

 
729

Other repossessed assets
157

 
614

Total nonperforming assets
$
32,470

 
$
20,676

 
 
 
 
Loans and leases past due greater than 90 days and still accruing
$
3,512

 
$
8,690

 
 
 
 
Total nonperforming loans and leases as a percentage of total loans and leases
0.62
%
 
0.39
%
Total nonperforming assets as a percentage of total assets
0.53
%
 
0.34
%
 
Total nonperforming assets, which are composed of nonaccrual loans and leases, OREO and other repossessed assets, increased $11.8 million from $20.7 million at December 31, 2015 to $32.5 million at March 31, 2016. The increase was primarily due to $8.6 million of taxi medallion loans and $2.7 million of equipment financing loans which were placed on non-accrual and downgraded during the first quarter of 2016.
 
Troubled Debt Restructured Loans and Leases

The following table sets forth information regarding troubled debt restructured loans and leases at the dates indicated:
 
At March 31, 2016
 
At December 31, 2015
 
(In Thousands)
Troubled debt restructurings:
 

 
 

On accrual
$
16,697

 
$
17,953

On nonaccrual
14,614

 
4,965

Total troubled debt restructurings
$
31,311

 
$
22,918



62


Changes in troubled debt restructured loans and leases were as follows for the periods indicated:

 
Three months ended March 31,
 
2016
 
2015
 
(In Thousands)
Balance at beginning of period
$
22,918

 
$
20,440

Additions
8,775

 
2,833

Net charge-offs (recoveries)

 
(28
)
Repayments
(382
)
 
(2,935
)
Other reductions (1)

 

Balance at end of period
$
31,311

 
$
20,310

(1) Other reductions include transfers to OREO and changes in troubled debt restructuring status.

Allowance for Loan and Lease Losses
 
 The allowance for loan and lease losses consists of general and specific allowances and reflects Management’s estimate of probable loan and lease losses inherent in the loan portfolio at the balance sheet date. Management uses a consistent and systematic process and methodology to evaluate the adequacy of the allowance for loan and lease losses on a quarterly basis. The allowance is calculated by loan type: commercial real estate loans, commercial loans and leases, indirect automobile loans, and consumer loans, each category of which is further segregated. A formula-based credit evaluation approach is applied to each group that is evaluated collectively, primarily by loss factors, which includes estimates of incurred losses over an estimated loss emergence period, assigned to each risk rating by type, coupled with an analysis of certain loans individually evaluated for impairment. Management continuously evaluates and challenges inputs and assumptions in the allowance for loan and lease loss.

The process to determine the allowance for loan and lease losses requires Management to exercise considerable judgment regarding the risk characteristics of the loan portfolios and the effect of relevant internal and external factors. While Management evaluates currently available information in establishing the allowance for loan and lease losses, future adjustments to the allowance for loan and lease losses may be necessary if conditions differ substantially from the assumptions used in making the evaluations. Management performs a comprehensive review of the allowance for loan and lease losses on a quarterly basis. In addition, various regulatory agencies, as an integral part of their examination process, periodically review a financial institution’s allowance for loan and lease losses and carrying amounts of other real estate owned. Such agencies may require the financial institution to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

During the third quarter of 2015, the Company enhanced and refined its general allowance methodology to provide a more precise quantification of probable losses in the portfolio. Under the enhanced methodology, Management combined the historical loss information of the Banks to generate a single set of ratios. Management believes it is appropriate to aggregate the ratios as the Banks share common environmental factors, operate in similar markets, and utilize common underwriting standards in accordance with the Company's Credit Policy. In prior periods, a historical loss history applicable to each Bank was used.

Management employed a similar analysis for the consolidation of the qualitative factors as it did for the quantitative factors. Again, Management believes the combination of the existing nine qualitative factors used at each of the Banks into a single group of factors for use across the Company is appropriate based on the commonality of environmental factors, markets, and underwriting standards among the Banks. In prior periods each of the Banks utilized a set of qualitative factors applicable to each Bank.

As of March 31, 2016, the Company had a portfolio of approximately $36.1 million in loans secured by taxi medallions issued by the cities of Boston and Cambridge.  Recently, application-based mobile ride services, such as Uber and Lyft, have generated increased competition in the taxi area, resulting in a reduction in taxi utilization and, as a result, a reduction in the collateral value and credit quality of taxi medallion loans.  This has increased the likelihood that loans secured by taxi medallions may default, or that the borrowers may be unable to repay these loans at maturity, potentially resulting in an increase in troubled debt restructurings, therefore, beginning with the quarter ended December 31, 2015, the Company’s allowance calculation included a further segmentation of the commercial loans and leases to reflect the increased risk in the

63


Company’s taxi medallion portfolio. This allowance calculation segmentation represents Management’s estimations of the risks associated with the portfolio, however, further declines in demand for taxi services or further deterioration in the value of taxi medallions may result in higher delinquencies and losses beyond that provided for in the allowance for loan and lease losses. 

Based on the refinements to the Company’s allowance methodology discussed above, Management determined that the potential risks anticipated by the unallocated allowance are now incorporated into the allowance methodology, making the unallocated allowance unnecessary. In prior periods, the unallocated allowance was used to recognize the estimated risk associated with the allocated general and specific allowances. It incorporated Management’s evaluation of existing conditions that were not included in the allocated allowance determinations and provided for losses that arise outside of the ordinary course of business.

See Note 5, “Allowance for Loan and Lease Losses,” to the unaudited consolidated financial statements for descriptions of how Management determines the balance of the allowance for loan and lease losses for each portfolio and class of loans.
 
The following tables present the changes in the allowance for loan and lease losses by portfolio segment for the three months ended March 31, 2016 and 2015.
 
At and for the Three Months Ended March 31, 2016
 
Commercial 
Real Estate
 
Commercial
 
Indirect 
Automobile
 
Consumer
 
Unallocated
 
Total
 
(Dollars in Thousands)
Balance at December 31, 2015
$
30,151

 
$
22,018

 
$
269

 
$
4,301

 
$

 
$
56,739

Charge-offs
(331
)
 
(288
)
 
(244
)
 
(12
)
 

 
(875
)
Recoveries

 
224

 
231

 
20

 

 
475

Provision (credit) for loan and lease losses

1,164

 
1,024

 
(35
)
 
114

 

 
2,267

Balance at March 31, 2016
$
30,984

 
$
22,978

 
$
221

 
$
4,423

 
$

 
$
58,606

 
 

 
 

 
 
 
 

 
 

 
 

Total loans and leases
$
2,766,398

 
$
1,398,639

 
$
11,220

 
$
954,188

 
N/A

 
$
5,130,445

Allowance for loan and lease losses as a percentage of total loans and leases
1.12
%
 
1.64
%
 
1.97
%
 
0.46
%
 
N/A

 
1.14
%
 
At and for the Three Months Ended March 31, 2015
 
Commercial
Real Estate
 
Commercial
 
Indirect 
Automobile
 
Consumer
 
Unallocated
 
Total
 
(Dollars in Thousands)
Balance at December 31, 2014
$
29,594

 
$
15,957

 
$
2,331

 
$
3,359

 
$
2,418

 
$
53,659

Charge-offs
(388
)
 
(450
)
 
(820
)
 
(7
)
 

 
(1,665
)
Recoveries

 
212

 
581

 
18

 

 
811

Provision (credit) for loan and lease losses
254

 
3,365

 
(1,634
)
 
249

 
67

 
2,301

Balance at March 31, 2015
$
29,460

 
$
19,084

 
$
458

 
$
3,619

 
$
2,485

 
$
55,106

 
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
2,500,887

 
$
1,227,352

 
$
23,335

 
$
883,020

 
N/A

 
$
4,634,594

Allowance for loan and lease losses as a percentage of total loans and leases
1.18
%
 
1.55
%
 
1.96
%
 
0.41
%
 
N/A

 
1.19
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The allowance for loan and lease losses was $58.6 million at March 31, 2016, or 1.14% of total loans and leases outstanding. This compared to an allowance for loan and lease losses of $56.7 million or 1.14% of total loans and leases outstanding, at December 31, 2015. The increase in the allowance for loan and lease losses from December 31, 2015 to March 31, 2016 was due to loan growth of $134.9 million during the first quarter of 2016, and a specific reserve recorded for an equipment financing loan, and was partially offset by the reduction in reserve due to a decrease in the historical loss factor.  The increase in substandard/impaired taxi medallion loans did not meaningfully increase the allowance for loan and lease losses as the risk in the portfolio was reserved for as of December 31, 2015.


64


Commercial Real Estate Loans
 
The allowance for commercial real estate loan losses was $31.0 million at March 31, 2016, or 1.12% of total commercial real estate loans outstanding. This compared to an allowance for commercial real estate loan losses of $30.2 million, or 1.13% of total commercial real estate loans outstanding, at December 31, 2015. Specific reserves on commercial real estate loans were $2.4 million and $2.3 million at March 31, 2016 and December 31, 2015, respectively. The $0.8 million increase in the allowance for commercial real estate loan losses during the first three months of 2016 was primarily driven by loan growth of $102.0 million, or 15.3% on an annualized basis from December 31, 2015 partially offset by the decrease in reserve due to the changes in loss factors.

The ratio of total criticized and classified commercial real estate loans to total commercial real estate loans increased to 1.06% at March 31, 2016 from 1.03% at December 31, 2015. The ratio of originated commercial real estate loans on nonaccrual to total originated commercial real estate loans increased to 0.17% at March 31, 2016 from 0.13% at December 31, 2015.

Net charge-offs in the commercial real estate loan portfolio for the three months ended March 31, 2016 and March 31, 2015 were $0.3 million and $0.4 million, respectively. As a percentage of average commercial loans and leases, annualized net charge-offs for the three months ended March 31, 2016 and March 31, 2015 were 0.05% and 0.06%, respectively.
 
Commercial Loans and Leases
 
The allowance for commercial loan and lease losses was $23.0 million, or 1.64% of total commercial loans and leases outstanding, at March 31, 2016, compared to $22.0 million, or 1.60%, at December 31, 2015.  Specific reserves on commercial loans and leases increased from $1.3 million at December 31, 2015 to $2.9 million at March 31, 2016. The $1.0 million increase in the allowance for commercial loan and lease losses during the first three months of 2016 was primarily driven by loan growth of $24.3 million, or 7.1% on an annualized basis, from December 31, 2015, and a specific reserve recorded for an equipment financing loan during the first quarter of 2016.

The ratio of total criticized and classified commercial loans and leases to total commercial loans and leases was 2.32% at March 31, 2016 as compared to 1.57% at December 31, 2015. The ratio of originated commercial loans and leases on nonaccrual to total originated commercial loans and leases increased to 1.28% at March 31, 2016 from 0.46% at December 31, 2015.
 
Net charge-offs in the commercial loan and lease portfolio for the three months ended March 31, 2016 and March 31, 2015 were $0.1 million and $0.2 million, respectively. As a percentage of average commercial loans and leases, annualized net charge-offs for the three months ended March 31, 2016 and March 31, 2015 were 0.02% and 0.08%, respectively.
 
Indirect Automobile Loans
 
The allowance for indirect automobile loan losses was $0.2 million, or 1.97% of total indirect automobile loans outstanding, at March 31, 2016, compared to $0.3 million, or 1.97% of the indirect automobile portfolio outstanding, at December 31, 2015. Loans outstanding decreased $2.5 million from $13.7 million at December 31, 2015 to $11.2 million at March 31, 2016. There were no loans individually evaluated for impairment in the indirect automobile portfolio at March 31, 2016 and December 31, 2015.
 
The ratio of indirect automobile loans with borrower credit scores below 660 to the total indirect automobile portfolio decreased to 45.3% at March 31, 2016 from 45.5% at December 31, 2015. The ratio of indirect automobile loans on nonaccrual to total indirect automobile loans decreased to 2.75% at March 31, 2016 compared to 4.93% at December 31, 2015.
 
Net charge-offs in the indirect automobile portfolio for the three months ended March 31, 2016 was negligible. This compared to net charge-offs of $0.2 million for the three months ended March 31, 2015. As a percentage of average loans and leases, the annualized net charge-offs for the three months ended March 31, 2015 was 0.34%.

Consumer Loans
 
The allowance for consumer loan losses, including residential loans and home equity loans and lines of credit, was $4.4 million, or 0.46% of total consumer loans and leases outstanding, at March 31, 2016, compared to $4.3 million, or 0.46%, at December 31, 2015. There was a nominal reserve for consumer loans individually evaluated for impairment at March 31, 2016 and December 31, 2015. The $0.1 million increased in the allowance for consumer loans during the first three months of 2016

65


was primarily driven by loan growth of $11.0 million, or 4.7% on an annualized basis, from December 31, 2015. The ratio of originated consumer loans on nonaccrual to total originated consumer loans decreased to 0.27% at March 31, 2016 from 0.29% at December 31, 2015.  The risk of loss on a home equity loan is higher since the property securing the loan has often been previously pledged as collateral for a first mortgage loan. The Company gathers and analyzes delinquency data, to the extent that data are available on these first liens, for purposes of assessing the collectability of the second liens held for the Company even if these home equity loans are not delinquent. This data are further analyzed for performance differences between amortizing and non-amortizing home equity loans, the percentage borrowed to total loan commitment, and by the amount of payments made by the borrower. The loss exposure is not considered to be high due to the combination of current property values, the historically low loan-to-value ratios, the low level of losses experienced in the past few years, and the low level of loan delinquencies at March 31, 2016. If the local economy weakens, a rise in losses in those loan classes could occur. Historically, losses in these classes have been low.

Net recoveries in the consumer portfolio for the three months ended March 31, 2016 and March 31, 2015 were $8.0 thousand and $11.0 thousand, respectively.

The following table sets forth the Company’s percent of allowance for loan and lease losses to the total allowance for loan and lease losses and the percent of loans to total loans for each of the categories listed at the dates indicated.
 
 
At March 31, 2016
 
At December 31, 2015
 
Amount
 
Percent of 
Allowance to 
Total Allowance
 
Percent of 
Loans to 
Total Loans
 
Amount
 
Percent of 
Allowance to 
Total Allowance
 
Percent of 
Loans to 
Total Loans
 
(Dollars in Thousands)
Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
21,735

 
37.1
%
 
38.2
%
 
$
21,100

 
37.3
%
 
37.5
%
Multi-family
6,684

 
11.4
%
 
13.3
%
 
6,376

 
11.2
%
 
13.2
%
Construction
2,565

 
4.4
%
 
2.5
%
 
2,675

 
4.7
%
 
2.6
%
Total commercial real estate loans
30,984

 
52.9
%
 
54.0
%
 
30,151

 
53.2
%
 
53.3
%
Commercial loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Commercial
12,901

 
22.0
%
 
12.0
%
 
12,745

 
22.5
%
 
11.9
%
Equipment financing
9,606

 
16.4
%
 
14.1
%
 
8,809

 
15.5
%
 
14.5
%
Condominium association
471

 
0.8
%
 
1.2
%
 
464

 
0.8
%
 
1.2
%
Total commercial loans and leases
22,978

 
39.2
%
 
27.3
%
 
22,018

 
38.8
%
 
27.6
%
Indirect automobile
221

 
0.4
%
 
0.2
%
 
269

 
0.5
%
 
0.3
%
Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
2,017

 
3.4
%
 
12.0
%
 
2,069

 
3.6
%
 
12.3
%
Home equity
2,277

 
3.9
%
 
6.2
%
 
2,149

 
3.8
%
 
6.3
%
Other consumer
129

 
0.2
%
 
0.3
%
 
83

 
0.1
%
 
0.2
%
Total consumer loans
4,423

 
7.5
%
 
18.5
%
 
4,301

 
7.5
%
 
18.8
%
Total
$
58,606

 
100.0
%
 
100.0
%
 
$
56,739

 
100.0
%
 
100.0
%

Investments
 
The investment portfolio exists primarily for liquidity purposes, and secondarily as sources of interest and dividend income, interest-rate risk management and tax planning as a counterbalance to loan and deposit flows. Investment securities are utilized as part of the Company’s asset/liability management and may be sold in response to, or in anticipation of, factors such as changes in market conditions and interest rates, security prepayment rates, deposit outflows, liquidity concentrations, and regulatory capital requirements.
 
The investment policy of the Company, which is reviewed and approved by the Board of Directors on an annual basis, specifies the types of investments that are acceptable, required investment ratings by at least one nationally recognized rating agency, concentration limits and duration guidelines. Compliance with the investment policy is monitored on a regular basis. In general, the Company seeks to maintain a high degree of liquidity and targets cash, cash equivalents and investment securities available-for-sale balances between 10% and 30% of total assets.

66


 
Cash, cash equivalents, and investment securities increased approximately $11.1 million, or 6.5% on an annualized basis, to $693.5 million at March 31, 2016 from $682.4 million at December 31, 2015. The increase was primarily driven by investment securities. Cash, cash equivalents, and investment securities were 11.2% of total assets at March 31, 2016, compared to 11.3% of total assets at December 31, 2015.
 
The following table sets forth certain information regarding the amortized cost and market value of the Company’s investment securities at the dates indicated:
 
 
At March 31, 2016
 
At December 31, 2015
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(In Thousands)
Investment securities available-for-sale:
 

 
 

 
 

 
 

Debt securities:
 

 
 

 
 

 
 

GSEs
$
56,108

 
$
57,259

 
$
40,658

 
$
40,627

GSE CMOs
189,529

 
189,180

 
198,000

 
193,816

GSE MBSs
240,138

 
243,214

 
230,213

 
229,881

SBA commercial loan asset-backed securities
134

 
133

 
148

 
147

Corporate debt obligations
43,173

 
44,238

 
46,160

 
46,486

Trust preferred securities
1,467

 
1,165

 
1,466

 
1,267

Total debt securities
530,549

 
535,189

 
516,645

 
512,224

Marketable equity securities
959

 
993

 
956

 
977

Total investment securities available-for-sale
$
531,508

 
$
536,182

 
$
517,601

 
$
513,201

 
 
 
 
 
 
 
 
Investment securities held-to-maturity:
 
 
 
 
 
 
 
GSEs
$
25,420

 
$
25,531

 
$
34,915

 
$
34,819

GSE MBSs
18,539

 
18,508

 
19,291

 
18,986

Municipal Obligations
38,950

 
39,767

 
39,051

 
39,390

Foreign Government Obligations
500

 
484

 
500

 
500

Total investment securities held-to-maturity
$
83,409

 
$
84,290

 
$
93,757

 
$
93,695

 
The fair value of investment securities is based principally on market prices and dealer quotes received from third-party, nationally-recognized pricing services for identical investment securities such as U.S. Treasury and agency securities. The Company's marketable equity securities are priced this way and are included in Level 1. These prices are validated by comparing the primary pricing source with an alternative pricing source when available. When quoted market prices for identical securities are unavailable, the Company uses market prices provided by independent pricing services based on recent trading activity and other observable information, including but not limited to market interest-rate curves, referenced credit spreads, and estimated prepayment speeds, where applicable. These investments include certain U.S. and government agency debt securities, GSE residential MBSs and CMOs, corporate debt securities, SBA commercial loan asset-backed securities, and trust preferred securities, all of which are included in Level 2.

Additionally, Management reviews changes in fair value from period to period and performs testing to ensure that prices received from the third parties are consistent with their expectation of the market. Changes in the prices obtained from the pricing service are analyzed from month to month, taking into consideration changes in market conditions including changes in mortgage spreads, changes in U.S. Treasury security yields, and changes in generic pricing of 15-year and 30-year securities. Additional analysis may include a review of prices provided by other independent parties, a yield analysis, a review of average life changes using Bloomberg analytics, and a review of historical pricing for the particular security.
 
Maturities, calls, and principal repayments for investment securities available-for-sale totaled $27.7 million and $20.0 million for the three months ended March 31, 2016 and 2015, respectively. Maturities, calls, and principal repayments for investment securities held-to-maturity totaled $13.7 million for the three months ended March 31, 2016 compared to zero for the same period in 2015. During the three months ended March 31, 2016, the Company purchased $42.0 million of investment

67


securities available-for-sale and $3.5 million investment securities held-to-maturity. This compared to $29.5 million of investment securities available-for-sale and no purchases of investment securities held-to-maturity for the same period in 2015. During the three months ended March 31, 2016 and 2015, the Company did not sell any investment securities available-for-sale or held-to-maturity.

At March 31, 2016, the fair value of all investment securities available-for-sale was $536.2 million, with net unrealized gains of $4.7 million, compared to a fair value of $513.2 million and net unrealized losses of $4.4 million at December 31, 2015. At March 31, 2016, $122.0 million, or 22.8% of the portfolio, had gross unrealized losses of $1.6 million. This compares to $368.1 million, or 71.7% of the portfolio, with gross unrealized losses of $6.0 million at December 31, 2015.

At March 31, 2016, the fair value of all investment securities held-to-maturity was $84.3 million with an amortized cost of $83.4 million and net unrealized gains of $0.9 million, compared to a fair value of $93.7 million, which approximated cost, at December 31, 2015. At March 31, 2016, $11.2 million, or 13.2% of the portfolio, had gross unrealized losses of $64.0 thousand. This compares to $52.3 million, or 55.8% of the portfolio, with gross unrealized losses of $0.4 million at December 31, 2015.

Management believes that these negative differences between amortized cost and fair value do not include credit losses, but rather differences in interest rates between the time of purchase and the time of measurement. It is more likely than not that the Company will not sell the investment securities before recovery, and, as a result, it will recover the amortized cost basis of the investment securities. As such, Management has determined that these investment securities are not other-than-temporarily impaired at March 31, 2016. If market conditions for investment securities worsen or the creditworthiness of the underlying issuers deteriorates, it is possible that the Company may recognize additional other-than-temporary impairments in future periods. For additional discussion on how the Company validates fair values provided by the third-party pricing service, see Note 13, “Fair Value of Financial Instruments.”

Restricted Equity Securities
 
Federal Reserve Bank Stock
 
The Company invests in the stock of the Federal Reserve Bank of Boston, as required by the Banks’ membership in the FRB. As of March 31, 2016 and December 31, 2015, the Company owned stock in the Federal Reserve Bank of Boston with a carrying value of $16.8 million.
 
FHLBB Stock
 
The Company invests in the stock of the FHLBB as one of the requirements to borrow funds. As of March 31, 2016 and December 31, 2015, the Company maintained an excess balance of capital stock of $1.7 million and $4.3 million, respectively, which allows for additional borrowing capacity at each of the Banks. The decrease of the excess balance of capital stock was the result of a stock buyback by the FHLBB in the amount of $679.0 thousand at one of the Banks. As of March 31, 2016 and December 31, 2015, the Company owned stock in the FHLBB with a carrying value of $48.2 million and $48.9 million, respectively. The FHLBB stated that it remained in compliance with all regulatory capital ratios at December 31, 2015 and, based on the most recent information available, was classified as “adequately capitalized” by its regulator.


68


Deposits
 
The following table presents the Company’s deposit mix at the dates indicated.
 
 
At March 31, 2016
 
At December 31, 2015
 
Amount
 
Percent
of Total
 
Weighted
Average
Rate
 
Amount
 
Percent
of Total
 
Weighted
Average
Rate
 
(Dollars in Thousands)
Non-interest-bearing accounts
$
793,195

 
18.1
%
 
%
 
$
799,117

 
18.6
%
 
%
 
 

 
 
 
 
 
 

 
 
 


NOW accounts
286,920

 
6.5
%
 
0.07
%
 
283,972

 
6.6
%
 
0.07
%
Savings accounts
555,843

 
12.7
%
 
0.26
%
 
540,788

 
12.5
%
 
0.25
%
Money market accounts
1,649,348

 
37.5
%
 
0.45
%
 
1,594,269

 
37.0
%
 
0.44
%
Certificate of deposit accounts
1,108,150

 
25.2
%
 
0.95
%
 
1,087,872

 
25.3
%
 
0.93
%
Total interest-bearing deposits
3,600,261

 
81.9
%
 
0.54
%
 
3,506,901

 
81.4
%
 
0.53
%
Total deposits
$
4,393,456

 
100.0
%
 
0.44
%
 
$
4,306,018

 
100.0
%
 
0.43
%
 
Total deposits increased $87.4 million, or 8.1% on an annualized basis, to $4.4 billion at March 31, 2016 as compared to $4.3 billion at December 31, 2015. Although deposits increased from December 31, 2015, as a percentage of total assets deposits decreased from 71.3% at December 31, 2015 to 71.1% at March 31, 2016, primarily due to change in balance sheet mix.

At March 31, 2016, the Company had $268.3 million of brokered deposits compared to $252.3 million at December 31, 2015. Brokered deposits allow the Company to seek additional funding by attracting deposits from outside the Company's core market. The Company's investment policy limits the amount of brokered deposits to 15% of total assets. Brokered deposits are included in the certificate of deposit balance, which increased $20.3 million, or 7.5% on an annualized basis, during the three months ended March 31, 2016. Certificates of deposit decreased as a percentage of total deposits to 25.2% at March 31, 2016 from 25.3% at December 31, 2015.

During the three months ended March 31, 2016, core deposits increased $67.2 million, or 8.3% on an annualized basis. However, as a percentage of total deposits, the ratio increased from 74.7% at December 31, 2015 to 74.8% at March 31, 2016, primarily due to the shift in deposit mix and increase in money market accounts.
 
The following table sets forth the distribution of the average balances of the Company’s deposit accounts for the periods indicated and the weighted average interest rates on each category of deposits presented. Averages for the periods presented are based on daily balances.
 
 
Three Months Ended March 31,
 
2016
 
2015
 
Average
Balance
 
Percent of
Total
Average
Deposits
 
Weighted
Average
Rate
 
Average
Balance
 
Percent of
Total
Average
Deposits
 
Weighted
Average
Rate
 
(Dollars in Thousands)
Core deposits:
 

 
 

 
 

 
 

 
 

 
 

Non-interest-bearing demand checking accounts
$
798,869

 
18.4
%
 
%
 
$
728,099

 
17.9
%
 
%
NOW accounts
279,414

 
6.4
%
 
0.07
%
 
237,718

 
5.8
%
 
0.07
%
Savings accounts
564,681

 
13.0
%
 
0.25
%
 
541,595

 
13.3
%
 
0.20
%
Money market accounts
1,629,054

 
37.5
%
 
0.44
%
 
1,536,751

 
37.7
%
 
0.48
%
Total core deposits
3,272,018

 
75.2
%
 
0.27
%
 
3,044,163

 
74.7
%
 
0.28
%
Certificate of deposit accounts
1,077,639

 
24.8
%
 
0.96
%
 
1,033,511

 
25.3
%
 
0.85
%
Total deposits
$
4,349,657

 
100.0
%
 
0.44
%
 
$
4,077,674

 
100.0
%
 
0.43
%
 
 
 
 
 
 
 
 
 
 
 
 


69


The following table sets forth the maturity periods for certificates of deposit of $250,000 or more deposited with the Company at the dates indicated:
 
 
At March 31, 2016
 
At December 31, 2015
 
Amount
 
Weighted
Average Rate
 
Amount
 
Weighted
Average Rate
 
(Dollars in Thousands)
Maturity period:
 

 
 

 
 

 
 

Six months or less
$
65,502

 
0.74
%
 
$
67,361

 
0.67
%
Over six months through 12 months
54,689

 
0.97
%
 
54,135

 
1.03
%
Over 12 months
50,676

 
1.51
%
 
46,856

 
1.52
%
 
$
170,867

 
1.04
%
 
$
168,352

 
1.02
%

Borrowed Funds 

The following table sets forth certain information regarding FHLBB advances, subordinated debentures and notes and other borrowed funds for the periods indicated:
 
Three Months Ended March 31,
 
2016
 
2015
 
(Dollars in Thousands)
Average balance outstanding
$
986,539

 
$
1,061,904

Maximum amount outstanding at any month-end during the period
1,028,309

 
1,094,459

Balance outstanding at end of period
1,028,309

 
924,925

Weighted average interest rate for the period
1.58
%
 
1.42
%
Weighted average interest rate at end of period
1.54
%
 
1.58
%

Advances from the FHLBB
 
On a long-term basis, the Company intends to continue to increase its core deposits. The Company also uses FHLBB borrowings and other wholesale borrowing opportunistically as part of the Company’s overall strategy to fund loan growth and manage interest-rate risk and liquidity. The advances are secured by blanket security agreements which require the Banks to maintain as collateral certain qualifying assets, principally mortgage loans and securities in an aggregate amount at least equal to outstanding advances. The maximum amount that the FHLBB will advance to member institutions, including the Company, fluctuates from time to time in accordance with the policies of the FHLBB. The Company may also borrow from the FRB “discount window” as necessary.
 
FHLBB borrowings increased $44.1 million to $906.0 million at March 31, 2016 from $861.9 million at December 31, 2015. The increase in FHLBB borrowings was primarily due to additional advances to fund loan and lease growth.  The Company also benefited from a FHLBB program which offered $14.1 million of borrowings at 0% interest for three years.
 
Repurchase Agreements
 
The Company periodically enters into repurchase agreements with its larger deposit and commercial customers as part of its cash management services which are typically overnight borrowings. Short-term borrowings and repurchase agreements with commercial customers increased $1.2 million during the three months ended March 31, 2016, from $38.2 million as of December 31, 2015 to $39.4 million as of March 31, 2016, as customers shifted funds from other deposit products.

Subordinated Debentures and Notes

In the third quarter of 2014, the Company offered $75.0 million of 6.0% fixed-to-floating subordinated notes due September 15, 2029. The Company is obligated to pay 6.0% interest semiannually between September 2014 and September 2024. Subsequently, the Company is obligated to pay 3-month LIBOR plus 3.315% quarterly until the notes mature in September 2029.


70


The following table summarizes the Company's subordinated debentures and notes at the dates indicated.

 
 
 
 
Carrying Amount at March 31, 2016
Carrying Amount at December 31, 2015
Issue Date
Rate
Maturity Date
Next Call Date
(Dollars in Thousands)
June 26, 2003
Variable; 3-month LIBOR + 3.10%
June 26, 2033
June 26, 2016
$
4,730

$
4,725

March 17, 2004
Variable; 3-month LIBOR + 2.79%
March 17, 2034
June 17, 2016
$
4,599

$
4,589

September 15, 2014
6.0% Fixed-to-Variable; 3-month LIBOR + 3.315%
September 15, 2029
September 15, 2024
$
73,649

$
73,624


The above carrying amounts of the subordinated debentures included $671.2 thousand of accretion adjustments and $1.4 million of capitalized debt issuance costs as of March 31, 2016. This compares to $688.4 thousand of accretion adjustments and $1.4 million of capitalized debt issuance costs as of December 31, 2015.

Derivative Financial Instruments
 
The Company has entered into interest-rate swaps with certain of its commercial customers and concurrently enters into offsetting swaps with third-party financial institutions. The Company did not have derivative fair value hedges or derivative cash flow hedges at March 31, 2016 or December 31, 2015. The following table summarizes certain information concerning the Company’s interest-rate swaps at March 31, 2016 and at December 31, 2015:
 
 
Interest-Rate Swaps
 
At March 31, 2016
 
At December 31, 2015
 
(Dollars in Thousands)
Notional principal amounts
$
583,035

 
$
490,632

Fixed weighted average interest rate from the Company to counterparty
4.23
%
 
4.30
%
Floating weighted average interest rate from counterparty to the Company
2.42
%
 
2.40
%
Weighted average remaining term to maturity (in months)
97

 
100

Fair value:
 

 
 
Recognized as an asset
$
18,583

 
$
8,656

Recognized as a liability
$
18,583

 
$
8,781


Stockholders’ Equity and Dividends
 
The Company’s total stockholders’ equity was $680.4 million at March 31, 2016, a $12.9 million increase compared to $667.5 million at December 31, 2015. The increase primarily reflects net income attributable to the Company of $12.8 million for the three months ended March 31, 2016, an unrealized gain on securities available-for-sale of $5.8 million (after-tax), an increase of $0.5 million related to stock-based compensation, offset by common stock dividends of $6.3 million paid in that same period.
 
Stockholders’ equity represented 11.01% of total assets at March 31, 2016, as compared to 11.05% at December 31, 2015. Tangible stockholders’ equity (total stockholders’ equity less goodwill and identified intangible assets, net) represented 8.83% of tangible assets (total assets less goodwill and identified intangible assets, net) at March 31, 2016, as compared to 8.81% at December 31, 2015.

For the three months ended March 31, 2016, the dividend payout ratios were 49.45%, compared to 47.54% for the three months ended December 31, 2015.

Results of Operations — Comparison of the Three and Three-Month Periods Ended March 31, 2016 and March 31, 2015
 
The primary drivers of the Company’s operating income are net interest income, which is strongly affected by the net yield on interest-earning assets and liabilities (“net interest margin”), the quality of the Company’s assets, its levels of non-interest income and non-interest expense, and its tax provision.

71


 
The Company’s net interest income represents the difference between interest income earned on its investments, loans and leases, and its cost of funds. Interest income depends on the amount of interest-earning assets outstanding during the period and the yield earned thereon. Cost of funds is a function of the average amount of deposits and borrowed money outstanding during the period and the interest rates paid thereon. The net interest margin is calculated by dividing net interest income by average interest-earning assets. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The increases (decreases) in the components of interest income and interest expense, expressed in terms of fluctuation in average volume and rate, are summarized under “Rate/Volume Analysis” below. Information as to the components of interest income, interest expense and average rates is provided under “Average Balances, Net Interest Income, Interest-Rate Spread and Net Interest Margin” below.
 
Because the Company’s assets and liabilities are not identical in duration and in repricing dates, the differential between the asset and liability repricing and duration is vulnerable to changes in market interest rates as well as the overall shape of the yield curve. These vulnerabilities are inherent to the business of banking and are commonly referred to as “interest-rate risk.” How interest-rate risk is measured and, once measured, how much interest-rate risk is taken is based on numerous assumptions and other subjective judgments. See the discussion in “Item 3. Quantitative and Qualitative Disclosures about Market Risk” below.
 
The quality of the Company’s assets also influences its earnings. Loans and leases that are not paid on a timely basis and exhibit other weaknesses can result in the loss of principal and/or interest income. Additionally, the Company must make timely provisions to the allowance for loan and lease losses based on estimates of probable losses inherent in the loan and lease portfolio. These additions, which are charged against earnings, are necessarily greater when greater probable losses are expected. Further, the Company incurs expenses as a result of resolving troubled assets. These variables reflect the “credit risk” that the Company takes on in the ordinary course of business and are further discussed under “Financial Condition — Asset Quality” above.

Net Interest Income
 
Net interest income of $49.2 million for the quarter ended March 31, 2016 increased $0.7 million, or 1.4%, as compared to the first quarter of 2015. This overall increase was the result of an increase in total interest income of $1.3 million, or 2.3%, to $57.9 million for the quarter ended March 31, 2016, offset by an increase in interest expense of $0.6 million, or 7.6%, to $8.7 million for the quarter ended March 31, 2016. Refer to “Results of Operations - Comparison of the Three-Month Period Ended March 31, 2016 and March 31, 2015 — Interest Income” and “Results of Operations - Comparison of the Three-Month Period Ended March 31, 2016 and March 31, 2015 — Interest Expense Deposit and Borrowed Funds” below for more details.

Net interest margin decreased to 3.45% in the first quarter of 2016 from 3.57% in the first quarter of 2015. The decrease in the net interest margin is the result of repricing interest-earning assets in a lower interest rate environment without a comparable offset in lower funding costs.

The yield on interest-earning assets decreased to 4.03% in the first quarter of 2016 from 4.11% during the first quarter of 2015. The decrease is the result of the continued pricing pressure due to the low interest rate environment and the intense
competition in most loan categories, as well as a decrease in accretion on acquired loans and leases, offset by a slight increase
in prepayment penalties and late charges and an increase in dividends from restricted equity securities, debt securities, and other short term investments during the first quarter of 2016. In the first quarter of 2016, the Company benefited from a $0.2 million accretion on acquired loans and leases, which contributed 1 basis point to yields on interest-earning assets, compared to $1.2 million, or 11 basis points, in the first quarter of 2015. The decrease was due to the continued paydowns of acquired loans and the recognition of the associated purchase accounting accretion. In addition, the Company recorded $0.6 million in prepayment penalties, which contributed 4 basis points to yields on interest-earning assets, in the first quarter of 2016, compared to $0.6 million, or 5 basis points, in the first quarter of 2015.

The overall cost of funds (including non-interest-bearing demand checking accounts) increased 2 basis points to 0.65% for the three months ended March 31, 2016 from 0.63% for the three months ended March 31, 2015. Refer to "Financial Condition - Borrowed Funds" above for more details.
  
Future net interest income, net interest spread and net interest margin may continue to be negatively affected by the low interest-rate environment; ongoing pricing pressures in both loan and deposit portfolios; and the ability of the Company to increase its core deposit ratio, increase its non-interest-bearing deposits as a percentage of total deposits, decrease its loan-to-deposit ratio, or decrease its reliance on FHLBB advances. They may also be negatively affected by changes in the amount of accretion on acquired loans and leases, deposits, and borrowed funds included in interest income and interest expense.

72



Average Balances, Net Interest Income, Interest-Rate Spread and Net Interest Margin

The following tables set forth information about the Company’s average balances, interest income and interest rates earned on average interest-earning assets, interest expense and interest rates paid on average interest-bearing liabilities, interest-rate spread, and net interest margin for the three months ended March 31, 2016 and March 31, 2015. Average balances are derived from daily average balances and yields include fees, costs, and purchase-accounting-related premiums and discounts which are considered adjustments to coupon yields in accordance with GAAP. Certain amounts previously reported have been reclassified to conform to the current period’s presentation.
 
 
Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
Average
Balance
 
Interest
 (1)
 
Average
Yield/
Cost
 
Average
Balance
 
Interest
 (1)
 
Average
Yield/
Cost
 
(Dollars in Thousands)
Assets:
 

 
 

 
 

 
 

 
 

 
 

Interest-earning assets:
 

 
 

 
 

 
 

 
 

 
 

Debt securities
$
604,034

 
$
3,011

 
1.99
%
 
$
555,558

 
$
2,683

 
1.93
%
Marketable and restricted equity securities
66,887

 
679

 
4.07
%
 
74,836

 
566

 
3.03
%
Short-term investments
41,861

 
39

 
0.38
%
 
49,841

 
21

 
0.17
%
Total investments
712,782

 
3,729

 
2.09
%
 
680,235

 
3,270

 
1.92
%
Commercial real estate loans (2)
2,698,098

 
27,266

 
4.04
%
 
2,475,950

 
26,245

 
4.24
%
Commercial loans and leases (2)
670,671

 
6,651

 
3.93
%
 
610,695

 
6,506

 
4.26
%
Equipment financing (2)
726,928

 
11,750

 
6.47
%
 
611,309

 
10,544

 
6.90
%
Indirect automobile loans (2)
12,493

 
153

 
4.93
%
 
282,494

 
2,142

 
3.08
%
Residential mortgage loans (2)
625,351

 
5,559

 
3.56
%
 
576,858

 
5,307

 
3.68
%
Other consumer loans (2)
330,078

 
3,117

 
3.78
%
 
299,119

 
2,828

 
3.83
%
Total loans and leases
5,063,619

 
54,496

 
4.30
%
 
4,856,425

 
53,572

 
4.41
%
Total interest-earning assets
5,776,401

 
58,225

 
4.03
%
 
5,536,660

 
56,842

 
4.11
%
Allowance for loan and lease losses
(57,125
)
 
 

 
 

 
(54,319
)
 
 

 
 

Non-interest-earning assets
373,582

 
 

 
 

 
369,773

 
 

 
 

Total assets
$
6,092,858

 
 

 
 

 
$
5,852,114

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity:
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 

 
 

 
 

 
 

 
 

 
 

NOW accounts
$
279,414

 
51

 
0.07
%
 
$
237,718

 
44

 
0.07
%
Savings accounts
564,681

 
344

 
0.25
%
 
541,595

 
273

 
0.20
%
Money market accounts
1,629,054

 
1,775

 
0.44
%
 
1,536,751

 
1,816

 
0.48
%
Certificates of deposit
1,077,639

 
2,575

 
0.96
%
 
1,033,511

 
2,171

 
0.85
%
Total interest-bearing deposits (3)
3,550,788

 
4,745

 
0.54
%
 
3,349,575

 
4,304

 
0.52
%
Advances from the FHLBB
863,960

 
2,669

 
1.22
%
 
941,314

 
2,504

 
1.06
%
Subordinated debentures and notes
82,955

 
1,256

 
6.06
%
 
82,784

 
1,248

 
6.03
%
Other borrowed funds
39,624

 
25

 
0.26
%
 
37,806

 
25

 
0.26
%
Total borrowed funds
986,539

 
3,950

 
1.58
%
 
1,061,904

 
3,777

 
1.42
%
Total interest-bearing liabilities
4,537,327

 
8,695

 
0.77
%
 
4,411,479

 
8,081

 
0.74
%
Non-interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Demand checking accounts (3)
798,869

 
 

 
 

 
728,099

 
 

 
 

Other non-interest-bearing liabilities
73,700

 
 

 
 

 
59,226

 
 

 
 

Total liabilities
5,409,896

 
 

 
 

 
5,198,804

 
 

 
 

Brookline Bancorp, Inc. stockholders’ equity
677,101

 
 

 
 

 
648,683

 
 

 
 

Noncontrolling interest in subsidiary
5,861

 
 

 
 

 
4,627

 
 

 
 

Total liabilities and equity
$
6,092,858

 
 

 
 

 
$
5,852,114

 
 

 
 

Net interest income (tax-equivalent basis) / Interest-rate spread (4)
 

 
49,530

 
3.26
%
 
 

 
48,761

 
3.37
%
Less adjustment of tax-exempt income
 

 
327

 
 

 
 

 
233

 
 

Net interest income
 

 
$
49,203

 
 

 
 

 
$
48,528

 
 

Net interest margin (5)
 

 
 

 
3.45
%
 
 

 
 

 
3.57
%

(1)
Tax-exempt income on debt securities, equity securities and revenue bonds included in commercial real estate and commercial loans is included on a tax-equivalent basis.

73


(2)
Loans on nonaccrual status are included in the average balances.
(3)
Including non-interest-bearing checking accounts, the average interest rate on total deposits was 0.44% and 0.43% in the three months ended March 31, 2016 and March 31, 2015, respectively.
(4)
Interest-rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(5)
Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.

 
 
 
 
 
 
 
 
 
 
 
 




74


Rate/Volume Analysis
 
The following table presents, on a tax-equivalent basis, the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (1) changes attributable to changes in volume (changes in volume multiplied by prior rate), (2) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (3) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
 
 
Three Months Ended March 31, 2016 as Compared to the Three Months Ended March 31, 2015
 
Increase
 
 
(Decrease) Due To
 
 
Volume
 
Rate
 
Net
 
(In Thousands)
Interest and dividend income
 

 
 
 
 

Debt securities
$
242

 
$
86

 
$
328

Marketable and restricted equity securities
(65
)
 
178

 
113

Short-term investments
(4
)
 
22

 
18

Total investments
173

 
286

 
459

Loans and leases:
 

 
 

 
 

Commercial real estate loans
2,283

 
(1,262
)
 
1,021

Commercial loans and leases
641

 
(496
)
 
145

Equipment financing
1,890

 
(684
)
 
1,206

Indirect automobile loans
(2,817
)
 
828

 
(1,989
)
Residential mortgage loans
430

 
(178
)
 
252

Other consumer loans
323

 
(34
)
 
289

Total loans and leases
2,750

 
(1,826
)
 
924

Total change in interest and dividend income
2,923

 
(1,540
)
 
1,383

 
 
 
 
 
 
Interest expense
 

 
 

 
 

Deposits:
 

 
 

 
 

NOW accounts
7

 

 
7

Savings accounts
10

 
61

 
71

Money market accounts
111

 
(152
)
 
(41
)
Certificates of deposit
100

 
304

 
404

Total deposits
228

 
213

 
441

Borrowed funds:
 
 
 
 
 
Advances from the FHLBB
(206
)
 
371

 
165

Subordinated debentures and notes
2

 
6

 
8

Other borrowed funds

 

 

Total borrowed funds
(204
)
 
377


173

Total change in interest expense
24

 
590

 
614

Change in tax-exempt income
94

 

 
94

Change in net interest income
$
2,805

 
$
(2,130
)
 
$
675



75


Interest Income

Loans and Leases
 
 
Three Months Ended March 31,
 
Dollar
 
Percent
 
2016
 
2015
 
Change
 
Change
 
(Dollars in Thousands)
Interest income — loans and leases:
 

 
 

 
 

 
 

Commercial real estate loans
$
27,266

 
$
26,245

 
$
1,021

 
3.9
 %
Commercial loans
6,402

 
6,314

 
88

 
1.4
 %
Equipment financing
11,750

 
10,544

 
1,206

 
11.4
 %
Indirect automobile loans
153

 
2,142

 
(1,989
)
 
-92.9
 %
Residential mortgage loans
5,559

 
5,307

 
252

 
4.7
 %
Other consumer loans
3,117

 
2,829

 
288

 
10.2
 %
Total interest income — loans and leases
$
54,247

 
$
53,381

 
$
866

 
1.6
 %
  
Interest income from loans and leases was $54.2 million for the three months ended March 31, 2016, resulting in a yield on total loans and leases of 4.3%. This compares to $53.4 million of interest on loans and leases and a yield of 4.41% for the three months ended March 31, 2015. The year-over-year increase of $0.9 million in interest income from loans and leases was due to an increase of $2.8 million due to increase in origination volume, offset by a decrease of $1.8 million due to changes in rate. Accretion on acquired loans and leases of $0.2 million contributed 1 basis point to net interest margin during the first quarter of 2016, compared to $1.2 million and 11 basis points in the first quarter of 2015. The decrease was due to the continued paydowns of acquired loans and the recognition of the associated purchase accounting accretion.

Investments
 
 
Three Months Ended March 31,
 
Dollar
 
Percent
 
2016
 
2015
 
Change
 
Change
 
(Dollars in Thousands)
Interest income — investments:
 

 
 

 
 

 
 

Debt securities
$
2,932

 
$
2,683

 
$
249

 
9.3
%
Marketable and restricted equity securities
680

 
524

 
156

 
29.8
%
Short-term investments
39

 
21

 
18

 
85.7
%
Total interest income — investments
$
3,651

 
$
3,228

 
$
423

 
13.1
%
 
Total investment income was $3.7 million for the three months ended March 31, 2016, compared to $3.2 million for the three months ended March 31, 2015. The yield on investments increased to 2.09% for the quarter ended March 31, 2016 from 1.92% for the quarter ended March 31, 2015. The $0.4 million year-over-year increase in quarterly interest income on investments was driven by a $0.2 million increase due to volume and a $0.3 million increase due to rates.













76



Interest Expense - Deposits and Borrowed Funds
 
 
Three Months Ended March 31,
 
Dollar
 
Percent
 
2016
 
2015
 
Change
 
Change
 
(Dollars in Thousands)
Interest expense:
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

NOW accounts
$
51

 
$
44

 
$
7

 
15.9
 %
Savings accounts
344

 
273

 
71

 
26.0
 %
Money market accounts
1,775

 
1,816

 
(41
)
 
-2.3
 %
Certificates of deposit
2,575

 
2,171

 
404

 
18.6
 %
Total interest expense - deposits
4,745

 
4,304

 
441

 
10.2
 %
Borrowed funds:
 

 
 

 
 

 
 

Advances from the FHLBB
2,669

 
2,504

 
165

 
6.6
 %
Subordinated debentures and notes
1,256

 
1,248

 
8

 
0.6
 %
Other borrowed funds
25

 
25

 

 
 %
Total interest expense - borrowed funds
3,950

 
3,777

 
173

 
4.6
 %
Total interest expense
$
8,695

 
$
8,081

 
$
614

 
7.6
 %
 
Deposits
 
Interest expense on deposits increased $0.4 million to $4.7 million for the three months ended March 31, 2016 from $4.3 million for the three months ended March 31, 2015. The cost of total interest-bearing deposits increased to 0.54% in the three months ended March 31, 2016 from 0.52% during the three months ended March 31, 2015. The increase in interest expense on deposits was due to a $0.2 million increase due to rates offered and a $0.2 million increase due to volume. Accretion on acquired deposits was $24.0 thousand and $43.0 thousand for the three months ended March 31, 2016 and March 31, 2015, respectively. Accretion had no impact on the Company's net interest margin for the three months ended March 31, 2016 and March 31, 2015.

Borrowed Funds
 
Interest expense on borrowed funds increased by $0.2 million, or 4.6%, to $4.0 million for the three months ended March 31, 2016 from $3.8 million for the three months ended March 31, 2015. The cost of borrowed funds increased to 1.58% for the three months ended March 31, 2016 from 1.42% for the three months ended March 31, 2015. The increase in interest expense was due to a $0.4 million increase due to higher borrowing rates and a decrease in interest expense of $0.2 million due to lower volume. Accretion on acquired borrowed funds of $0.6 million improved the Company’s net interest margin by 4 basis points for the three months ended March 31, 2016. This compared to $0.7 million and 5 basis points for the three months ended March 31, 2015.


77


Provision for Credit Losses
 
The provision for credit losses are set forth below:
 
 
Three Months Ended March 31,
 
Dollar
 
Percent
 
2016
 
2015
 
Change
 
Change
 
(Dollars in Thousands)
Provision (credit) for loan and lease losses:
 

 
 

 
 

 
 

Commercial real estate
$
1,164

 
$
254

 
$
910

 
358.3
 %
Commercial
1,024

 
3,365

 
(2,341
)
 
-69.6
 %
Indirect automobile
(35
)
 
(1,634
)
 
1,599

 
-97.9
 %
Consumer
114

 
249

 
(135
)
 
-54.2
 %
Unallocated

 
67

 
(67
)
 
-100.0
 %
Total provision for loan and lease losses
2,267

 
2,301

 
(34
)
 
-1.5
 %
Unfunded credit commitments
111

 
(38
)
 
149

 
-392.1
 %
Total provision for credit losses
$
2,378

 
$
2,263

 
$
115

 
5.1
 %

The provision for credit losses increased $0.1 million, or 5.1%, to $2.4 million for the three months ended March 31, 2016 from $2.3 million for the three months ended March 31, 2015. The increase in total provision was primarily driven by the increase in provision due to continued loan growth in the commercial real estate and commercial portfolios and the increases in provision for acquired loans and unfunded credit commitments, offset by the decrease in provision due to risk rating migration and loss factor changes and the decrease in net charge-offs.

See Management’s discussion of “Financial Condition — Allowance for Loan and Lease Losses” and Note 5, “Allowance for Loan and Lease Losses,” to the unaudited consolidated financial statements for a description of how Management determined the allowance for loan and lease losses for each portfolio and class of loans.

Non-Interest Income
 
The following table sets forth the components of non-interest income for the periods indicated:
 
 
Three Months Ended March 31,
 
Dollar
 
Percent
 
2016
 
2015
 
Change
 
Change
 
(Dollars in Thousands)
Deposit fees
$
2,145

 
$
2,066

 
$
79

 
3.8
 %
Loan fees
330

 
342

 
(12
)
 
(3.5
)%
Loan level derivative income, net
1,629

 

 
1,629

 
100.0
 %
Gain on sales of loans and leases held-for-sale
905

 
869

 
36

 
4.1
 %
Other
1,460

 
1,193

 
267

 
22.4
 %
Total non-interest income
$
6,469

 
$
4,470

 
$
1,999

 
44.7
 %
 
Total non-interest income increased $2.0 million, or 44.7%, to $6.5 million for three months ended March 31, 2016, from $4.5 million for the same period in 2015. The increase was primarily due to an increase of $1.6 million in loan level derivative income, net and an increase of $0.3 million in other income.

Loan level derivative income, net increased $1.6 million, or 100.0%, to $1.6 million for the three months ended March 31, 2016 from zero for the same period in 2015 driven by the new loan level interest rate swap agreements completed in the period.

Other income increased $0.3 million, or 22.4%, to $1.5 million for three months ended March 31, 2016 from $1.2 million for the same period of 2015, primarily driven by an increase in fee income generated by insurance and investment sales transactions.

78


Non-Interest Expense
 
The following table sets forth the components of non-interest expense: 
 
Three Months Ended March 31,
 
Dollar
 
Percent
 
2016
 
2015
 
Change
 
Change
 
(Dollars in Thousands)
Compensation and employee benefits
$
18,727

 
$
17,524

 
$
1,203

 
6.9
 %
Occupancy
3,526

 
3,472

 
54

 
1.6
 %
Equipment and data processing
3,714

 
4,020

 
(306
)
 
(7.6
)%
Professional services
966

 
1,094

 
(128
)
 
(11.7
)%
FDIC insurance
878

 
867

 
11

 
1.3
 %
Advertising and marketing
861

 
748

 
113

 
15.1
 %
Amortization of identified intangible assets
635

 
738

 
(103
)
 
(14.0
)%
Other
2,746

 
2,863

 
(117
)
 
(4.1
)%
Total non-interest expense
$
32,053

 
$
31,326

 
$
727

 
2.3
 %
 
Non-interest expense increased $0.7 million, or 2.3%, to $32.1 million for the three months ended March 31, 2016 from $31.3 million for the same period in 2015. The increase was primarily due to an increase of $1.2 million in compensation and employee benefits expense, partially offset by a decrease of $0.3 million in equipment and data processing expense, and a decrease of $0.1 million in professional services expense.

The efficiency ratio decreased to 57.57% for three months ended March 31, 2016 from 59.11% for the three months ended March 31, 2015. Efforts to drive revenue growth contributed to the improvement in the efficiency ratio in 2016.
 
Compensation and employee benefits expense increased $1.2 million, or 6.9%, to $18.7 million for the three months ended March 31, 2016 from $17.5 million for the same period in 2015, primarily driven by an increase in employee headcount and incentive plan expenses.

Equipment and data processing expense decreased $0.3 million, or 7.6%, to $3.7 million for three months ended March 31, 2016 from $4.0 million for the same period in 2015, primarily driven by a decrease in core processing system expenses from the sale of the indirect automobile loan portfolio in the first quarter of 2015.

Professional services expense decreased $0.1 million, or 11.7%, to $1.0 million for the three months ended March 31, 2016 from $1.1 million for the same period in 2015, primarily due to lower audit, legal, and compliance fees incurred in 2016.

Provision for Income Taxes
 
 
Three Months Ended March 31,
 
Dollar
 
Percent
 
2016
 
2015
 
Change
 
Change
 
(Dollars in Thousands)
Income before provision for income taxes
$
21,241

 
$
19,409

 
$
1,832

 
9.4
 %
Provision for income taxes
7,599

 
7,104

 
495

 
7.0
 %
Net income, before noncontrolling interest in subsidiary
$
13,642

 
$
12,305

 
$
1,337

 
10.9
 %
 
 
 
 
 
 
 
 
Effective tax rate
35.8
%
 
36.6
%
 
N/A

 
-0.8
 %
 
The Company recorded income tax expense of $7.6 million for the three months ended March 31, 2016, compared to $7.1 million for the three months ended March 31, 2015, representing effective tax rates of 35.8% and 36.6%, respectively. The 0.8% decrease in the effective tax rate in 2016 is primarily attributable to the recent changes in New York State, New York City, Rhode Island, and Connecticut tax laws, an increase in the Company's investments in municipal securities, and the transfer of certain municipal securities to security corporations in 2015.


79


Liquidity and Capital Resources

Liquidity
 
Liquidity is defined as the ability to meet current and future financial obligations of a short-term nature. The Company further defines liquidity as the ability to respond to the needs of depositors and borrowers, as well as to earnings enhancement opportunities, in a changing marketplace. Liquidity management is monitored by an Asset/Liability Committee (“ALCO”), consisting of members of Management, which is responsible for establishing and monitoring liquidity targets as well as strategies and tactics to meet these targets.
 
The primary source of funds for the payment of dividends and expenses by the Company is dividends paid to it by its Banks and Brookline Securities Corp. The primary sources of liquidity for the Banks consist of deposit inflows, loan repayments, borrowed funds and maturing investment securities.
 
Deposits, which are considered the most stable source of liquidity, totaled $4.4 billion at March 31, 2016, and represented 81.0% of total funding (the sum of total deposits and total borrowings), compared to deposits of $4.3 billion, or 81.4% of total funding, at December 31, 2015. Core deposits, which consist of demand checking, NOW, savings and money market accounts, totaled $3.3 billion at March 31, 2016 and represented 74.8% of total deposits, compared to core deposits of $3.2 billion, or 74.7% of total deposits, at December 31, 2015. Additionally, the Company acquired $268.3 million of brokered deposits at March 31, 2016, which represented 6.1% of total deposits compared to $252.3 million or 5.9% of total deposits at December 31, 2015. The Company offers attractive interest rates based on market conditions to increase deposits balances, while managing cost of funds.
 
Borrowings are used to diversify the Company’s funding mix and to support asset growth. When profitable lending and investment opportunities exist, access to borrowings provides a means to fund the balance sheet. Borrowings totaled $1.0 billion at March 31, 2016, representing 19.0% of total funding, compared to $983.0 million, or 18.6% of total funding, at December 31, 2015.
As members of the FHLBB, the Banks have access to both short- and long-term borrowings. As of March 31, 2016, the Company's total borrowing limit from the FHLBB for advances and repurchase agreements was $1.5 billion as compared to $1.3 billion as of December 31, 2015, based on the level of qualifying collateral available for these borrowings.
 As of March 31, 2016, the Banks also have access to funding through certain uncommitted lines of credit of $119.0 million. The Company had a $12.0 million committed line of credit for contingent liquidity as of March 31, 2016.
The Company has access to the Federal Reserve Bank "discount window" to supplement its liquidity. The Company has $66.0 million of borrowing capacity at the Federal Reserve Bank as of March 31, 2016. As of March 31, 2016, the Company did not have any borrowings with the Federal Reserve Bank outstanding.
Additionally, the Banks have access to liquidity through repurchase agreements and brokered deposits.
In general, the Company seeks to maintain a high degree of liquidity and targets cash, cash equivalents and investment securities available-for-sale with balances between 10% and 30% of total assets. At March 31, 2016, cash, cash equivalents and investment securities available-for-sale totaled $610.1 million, or 9.9% of total assets. This compares to $588.7 million, or 9.7% of total assets, at December 31, 2015.

While Management believes that the Company has adequate liquidity to meet its commitments and to fund the Banks’ lending and investment activities, the availability of these funding sources is subject to broad economic conditions and could be restricted in the future. Such restrictions would impact the Company’s immediate liquidity and/or additional liquidity needs.

Off-Balance-Sheet Financial Instruments
 
The Company is party to off-balance-sheet financial instruments in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby and commercial letters of credit and interest-rate swaps. According to GAAP, these financial instruments are not recorded in the financial statements until they are funded or related fees are incurred or received.
 
The contract amounts reflect the extent of the involvement the Company has in particular classes of these instruments. Such commitments involve, to varying degrees, elements of credit risk and interest-rate risk in excess of the amount recognized in the consolidated balance sheet. The Company’s exposure to credit loss in the event of non-performance by the counterparty is represented by the contractual amount of the instruments. The Company uses the same policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

80


 
Financial instruments with off-balance-sheet risk at the dates indicated follow:
 
 
At March 31, 2016
 
At December 31, 2015
 
(In Thousands)
Financial instruments whose contract amounts represent credit risk:
 

 
 

Commitments to originate loans and leases:
 

 
 

Commercial real estate
$
18,865

 
$
36,000

Commercial
74,620

 
78,017

Residential mortgage
15,364

 
19,430

Unadvanced portion of loans and leases
643,148

 
648,291

Unused lines of credit:
 

 
 

Home equity
306,284

 
280,786

Other consumer
12,895

 
12,383

Other commercial
117

 
529

Unused letters of credit:
 

 
 

Financial standby letters of credit
12,123

 
12,389

Performance standby letters of credit
622

 
392

Commercial and similar letters of credit
878

 
821

Back-to-back interest-rate swaps
583,035

 
490,632



























81



Capital Resources
 
As of March 31, 2016, the Company and the Banks are each under the primary regulation of, and must comply with, the capital requirements of the FRB. As of March 31, 2016, the Company and the Banks exceeded all regulatory capital requirements and were considered “well-capitalized” under prompt corrective action regulations, as amended to reflect the changes under Basel III Capital Rules. The following table presents actual and required capital ratios as of March 31, 2016 for the Company and the Banks under the Basel III Capital Rules based on the phase-in provision of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased in.


 
 
Actual
 
Minimum Required  for
Capital Adequacy
Purposes
 
Minimum Required  for Fully Phased in Capital Adequacy Purposes
 
Minimum Required To
Be Considered
 “Well-Capitalized” Under Prompt Corrective Action Provisions
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 
(Dollars in Thousands)
At March 31, 2016:
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brookline Bancorp, Inc.
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

Tier 1 leverage capital ratio
(1)
$
551,590

 
9.27
%
 
$
238,011

 
4.00
%
 
$
238,011

 
4.00
%
 
N/A

 
N/A

Common equity tier 1 capital ratio
(2)
536,376

 
10.47
%
 
230,534

 
4.50
%
 
358,609

 
7.00
%
 
N/A

 
N/A

Tier 1 risk-based capital ratio
(3)
551,590

 
10.77
%
 
307,292

 
6.00
%
 
435,331

 
8.50
%
 
N/A

 
N/A

Total risk-based capital ratio
(4)
685,261

 
13.38
%
 
409,723

 
8.00
%
 
537,761

 
10.50
%
 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brookline Bank
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

Tier 1 leverage capital ratio
(1)
$
375,952

 
10.38
%
 
$
144,876

 
4.00
%
 
$
144,876

 
4.00
%
 
$
181,094

 
5.00
%
Common equity tier 1 capital ratio
(2)
369,575

 
11.38
%
 
146,141

 
4.50
%
 
227,331

 
7.00
%
 
211,093

 
6.50
%
Tier 1 risk-based capital ratio
(3)
375,952

 
11.57
%
 
194,962

 
6.00
%
 
276,196

 
8.50
%
 
259,950

 
8.00
%
Total risk-based capital ratio
(4)
414,664

 
12.76
%
 
259,977

 
8.00
%
 
341,220

 
10.50
%
 
324,972

 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BankRI
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

Tier 1 leverage capital ratio
(1)
$
173,972

 
8.69
%
 
$
80,079

 
4.00
%
 
$
80,079

 
4.00
%
 
$
100,099

 
5.00
%
Common equity tier 1 capital ratio
(2)
173,972

 
10.71
%
 
73,097

 
4.50
%
 
113,707

 
7.00
%
 
105,585

 
6.50
%
Tier 1 risk-based capital ratio
(3)
173,972

 
10.71
%
 
97,463

 
6.00
%
 
138,073

 
8.50
%
 
129,951

 
8.00
%
Total risk-based capital ratio
(4)
192,486

 
11.85
%
 
129,948

 
8.00
%
 
170,557

 
10.50
%
 
162,435

 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Ipswich
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

Tier 1 leverage capital ratio
(1)
$
33,005

 
9.42
%
 
$
14,015

 
4.00
%
 
$
14,015

 
4.00
%
 
$
17,519

 
5.00
%
Common equity tier 1 capital ratio
(2)
33,005

 
13.45
%
 
11,043

 
4.50
%
 
17,177

 
7.00
%
 
15,950

 
6.50
%
Tier 1 risk-based capital ratio
(3)
33,005

 
13.45
%
 
14,723

 
6.00
%
 
20,858

 
8.50
%
 
19,631

 
8.00
%
Total risk-based capital ratio
(4)
35,802

 
14.59
%
 
19,631

 
8.00
%
 
25,766

 
10.50
%
 
24,539

 
10.00
%

1.
Tier 1 leverage capital ratio is calculated by dividing Tier 1 capital by average assets.
2.
Common equity tier 1 capital ratio is calculated by dividing common equity Tier 1 capital by risk-weighted assets. The ratio was established as part of the implementation of Basel III, effective January 1, 2015.
3.
Tier 1 risk-based capital ratio is calculated by dividing Tier 1 capital by risk-weighted assets.
4.
Total risk-based capital ratio is calculated by dividing total capital by risk-weighted assets.














82








The following table presents actual and required capital ratios as of December 31, 2015 for the Company and the Banks under the regulatory capital rules then in effect.

 
 
Actual
 
Minimum Required for
Capital Adequacy
Purposes
 
Minimum Required To
Be Considered
 “Well-Capitalized” Under Prompt Corrective Action Provisions
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 
(Dollars in Thousands)
At December 31, 2015:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Brookline Bancorp, Inc.
 
 

 
 

 
 

 
 

 
 

 
 

Tier 1 leverage capital ratio
(1)
$
545,035

 
9.37
%
 
$
231,930

 
4.00
%
 
N/A

 
N/A

Common equity tier 1 capital ratio
(2)
530,505

 
10.62
%
 
225,214

 
4.50
%
 
N/A

 
N/A

Tier 1 risk-based capital ratio
(3)
545,035

 
10.91
%
 
300,019

 
6.00
%
 
N/A

 
N/A

Total risk-based capital ratio
(4)
676,709

 
13.54
%
 
401,013

 
8.00
%
 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
Brookline Bank
 
 

 
 

 
 

 
 

 
 

 
 

Tier 1 leverage capital ratio
(1)
$
380,003

 
10.78
%
 
$
141,003

 
4.00
%
 
$
176,254

 
5.00
%
Common equity tier 1 capital ratio
(2)
374,002

 
11.89
%
 
141,548

 
4.50
%
 
204,459

 
6.50
%
Tier 1 risk-based capital ratio
(3)
380,003

 
12.08
%
 
188,743

 
6.00
%
 
251,658

 
8.00
%
Total risk-based capital ratio
(4)
417,270

 
13.27
%
 
251,557

 
8.00
%
 
314,446

 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
BankRI
 
 

 
 

 
 

 
 

 
 

 
 

Tier 1 leverage capital ratio
(1)
$
171,967

 
8.51
%
 
$
80,831

 
4.00
%
 
$
101,038

 
5.00
%
Common equity tier 1 capital ratio
(2)
171,967

 
10.63
%
 
72,799

 
4.50
%
 
105,154

 
6.50
%
Tier 1 risk-based capital ratio
(3)
171,967

 
10.63
%
 
97,065

 
6.00
%
 
129,420

 
8.00
%
Total risk-based capital ratio
(4)
189,953

 
11.74
%
 
129,440

 
8.00
%
 
161,800

 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
First Ipswich
 
 

 
 

 
 

 
 

 
 

 
 

Tier 1 leverage capital ratio
(1)
$
32,831

 
9.26
%
 
$
14,182

 
4.00
%
 
$
17,727

 
5.00
%
Common equity tier 1 capital ratio
(2)
32,831

 
13.87
%
 
10,652

 
4.50
%
 
15,386

 
6.50
%
Tier 1 risk-based capital ratio
(3)
32,831

 
13.87
%
 
14,202

 
6.00
%
 
18,936

 
8.00
%
Total risk-based capital ratio
(4)
35,617

 
15.05
%
 
18,933

 
8.00
%
 
23,666

 
10.00
%

1.
Tier 1 leverage capital ratio is calculated by dividing Tier 1 capital by average assets.
2.
Common equity tier 1 capital ratio is calculated by dividing common equity Tier 1 capital by risk-weighted assets. The ratio was established as part of the implementation of Basel III, effective January 1, 2015.
3.
Tier 1 risk-based capital ratio is calculated by dividing Tier 1 capital by risk-weighted assets.
4.
Total risk-based capital ratio is calculated by dividing total capital by risk-weighted assets.


83


Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
Market Risk
 
Market risk is the risk that the market value or estimated fair value of the Company’s assets, liabilities and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that the Company’s net income will be significantly reduced by interest-rate changes.
 
Interest-Rate Risk
 
The principal market risk facing the Company is interest-rate risk, which can come in a variety of forms, including repricing risk, yield-curve risk, basis risk, and prepayment risk. Repricing risk exists when the change in the average yield of either interest-earning assets or interest-bearing liabilities is more sensitive than the other to changes in market interest rates. Such a change in sensitivity could reflect a number of possible mismatches in the repricing opportunities of the Company’s assets and liabilities. Yield-curve risk reflects the possibility that the changes in the shape of the yield curve could have different effects on the Company’s assets and liabilities. Basis risk exists when different parts of the balance sheet are subject to varying base rates reflecting the possibility that the spread from those base rates will deviate. Prepayment risk is associated with financial instruments with an option to prepay before the stated maturity, often a disadvantage to the person selling the option; this risk is most often associated with the prepayment of loans, callable investments and callable borrowings.
 
Asset/Liability Management
 
Market risk and interest-rate risk management are governed by the Company’s Asset/Liability Committee (“ALCO”). The ALCO establishes exposure limits that define the Company’s tolerance for interest-rate risk. The ALCO and the Company's Treasury Group measure and manage the composition of the balance sheet over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products. The ALCO monitors current exposures versus limits and reports those results to the Board of Directors. The policy limits and guidelines serve as benchmarks for measuring interest-rate risk and for providing a framework for evaluation and interest-rate risk-management decision-making. The Company measures its interest-rate risk by using an asset/liability simulation model. The model considers several factors to determine the Company’s potential exposure to interest-rate risk, including measurement of repricing gaps, duration, convexity, value-at-risk, market value of portfolio equity under assumed changes in the level of interest rates, the shape of yield curves, and general market volatility.
 
Management controls the Company’s interest-rate exposure using several strategies, which include adjusting the maturities of securities in the Company’s investment portfolio, limiting or expanding the terms of loans originated, limiting fixed-rate deposits with terms of more than five years, and adjusting maturities of FHLBB advances. The Company limits this risk by restricting the types of MBSs it invests in to those with limited average life changes under certain interest-rate-shock scenarios, or securities with embedded prepayment penalties. The Company also places limits on holdings of fixed-rate mortgage loans with maturities greater than five years. The Company also may use derivative instruments, principally interest-rate swaps, to manage its interest-rate risk; however, the Company had no derivative fair value hedges or derivative cash flows at March 31, 2016 or December 31, 2015. See Note 10, “Derivatives and Hedging Activities,” to the unaudited consolidated financial statements.

Measuring Interest-Rate Risk
 
As noted above, interest-rate risk can be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest-rate sensitivity gap. An asset or liability is said to be interest-rate sensitive within a specific period if it will mature or reprice within that period. The interest-rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive liabilities. A gap is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets. During a period of falling interest rates, therefore, a positive gap would tend to adversely affect net interest income. Conversely, during a period of rising interest rates, a positive gap position would tend to result in an increase in net interest income.
 
The Company's interest-rate risk position is measured using both income simulation and interest-rate sensitivity "gap" analysis. Income simulation is the primary tool for measuring the interest-rate risk inherent in the Company’s balance sheet at a given point in time by showing the effect on net interest income, over a twelve-month period, of a variety of interest-rate shocks. These simulations take into account repricing, maturity, and prepayment characteristics of individual products. The

84


ALCO reviews simulation results to determine whether the exposure resulting from changes in market interest rates remains within established tolerance levels over a twelve-month horizon, and develops appropriate strategies to manage this exposure. The Company’s interest-rate risk analysis remains modestly asset-sensitive at March 31, 2016.
 
As of March 31, 2016, net interest income simulation indicated that the Company’s exposure to changing interest rates was within tolerance. The ALCO reviews the methodology utilized for calculating interest-rate risk exposure and may periodically adopt modifications to this methodology. The following table presents the estimated impact of interest-rate changes on the Company’s estimated net interest income over the twelve-month periods indicated:
 
 
Estimated Exposure to Net Interest Income
over Twelve-Month Horizon Beginning
 
 
March 31, 2016
 
December 31, 2015
Gradual Change in
Interest Rate Levels
 
Dollar
Change
 
Percent
Change
 
Dollar
Change
 
Percent
Change
 
 
(Dollars in Thousands)
Up 300 basis points
 
6,412

 
3.2
 %
 
11,616

 
5.9
 %
Up 200 basis points
 
4,417

 
2.2
 %
 
8,144

 
4.2
 %
Up 100 basis points
 
2,277

 
1.2
 %
 
4,246

 
2.2
 %
Down 100 basis points
 
(4,257
)
 
(2.1
)%
 
(8,852
)
 
(4.5
)%
 
The estimated impact of a 300 basis points increase in market interest rates on the Company's estimated net interest income over a twelve-month horizon was a positive 3.2% at March 31, 2016, compared to a positive 5.9% at December 31, 2015. The increase in asset sensitivity was primarily due to incremental balance sheet growth funded with short term wholesale funding.

The Company also uses interest-rate sensitivity “gap” analysis to provide a more general overview of its interest-rate risk profile. The interest-rate sensitivity gap is defined as the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within a given time period. At March 31, 2016, the Company’s one-year cumulative gap was a negative $221.0 million, or 3.8% of total interest-earning assets, compared with a negative $214.1 million, or 3.8% of total interest-earning assets, at December 31, 2015.
 
The assumptions used in the Company's interest-rate sensitivity simulation discussed above are inherently uncertain and, as a result, the simulations cannot precisely measure net interest income or precisely predict the impact of changes in interest rates. For additional discussion on interest-rate risk see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” of the Company’s 2015 Annual Report on Form 10-K.

Economic Value of Equity ("EVE") at Risk Simulation is conducted in tandem with net interest income simulations, to ascertain a longer term view of the Company’s interest-rate risk position by capturing longer-term repricing risk and options risk embedded in the balance sheet. It measures the sensitivity of the economic value of equity to changes in interest rates. The EVE at Risk Simulation values only the current balance sheet and does not incorporate growth assumptions. As with the net interest income simulation, this simulation captures product characteristics such as loan resets, repricing terms, maturity dates, and rate caps and floors. Key assumptions include loan prepayment speeds, deposit pricing elasticity and non-maturity deposit attrition rates. These assumptions can have significant impacts on valuation results as the assumptions remain in effect for the entire life of each asset and liability. The Company conducts non-maturity deposit behavior studies on a periodic basis to support deposit assumptions used in the valuation process. All key assumptions are subject to a periodic review.

EVE at Risk Simulation is calculated by estimating the net present value of all future cash flows from existing assets and liabilities using current interest rates as well as parallel shocks to the current interest-rate environment. The following table sets forth the estimated percentage change in the Company’s EVE at Risk Simulation, assuming various shifts in interest rates. Given the interest rate environment at March 31, 2016, simulations for interest rate declines of more than 100 basis points were not deemed to be meaningful.


85


 
 
Estimated Percent Change in EVE at Risk
Parallel Shock in Interest Rate Levels
 
At March 31, 2016
 
At December 31, 2015
 
 
 
 
 
Up 300%
 
8.8
 %
 
7.1
 %
Up 200%
 
5.7
 %
 
4.2
 %
Up 100%
 
2.9
 %
 
2.0
 %
Down 100%
 
(6.3
)%
 
(7.7
)%

Item 4. Controls and Procedures
 
Controls and Procedures
 
Under the supervision and with the participation of the Company’s Management, including the Company’s Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), the Company has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer considered that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s Management, including its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
There has been no change in the Company’s internal control over financial reporting identified in connection with the quarterly evaluation that occurred during the Company’s last fiscal quarter that has materially and detrimentally affected, or is reasonably likely to materially and detrimentally affect, the Company’s internal controls over financial reporting.
 
The Company’s Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a -15(f). The Company’s internal control system was designed to provide reasonable assurance to its Management and the Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company’s Management assessed the effectiveness of its internal control over financial reporting as of the end of the period covered by this report.
 
Management’s Report on Internal Control Over Financial Reporting as of December 31, 2015 and the related Report of Independent Registered Public Accounting Firm thereon appear on pages F-1 and F-2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.


86


PART II — OTHER INFORMATION
Item 1. Legal Proceedings
 
There are no material pending legal proceedings other than those that arise in the normal course of business. In the opinion of Management, after consulting with legal counsel, the consolidated financial position and results of operations of the Company are not expected to be affected materially by the outcome of such proceedings. 

Item 1A. Risk Factors
 
There have been no material changes to the risk factors disclosed in Item 1A of the Company’s Form 10-K for the year ended December 31, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
a)        Not applicable.
 
b)        Not applicable.
 
c)         None.

Item 3. Defaults Upon Senior Securities
 
a)        None.
 
b)        None.

Item 4. Mine Safety Disclosures
 
Not applicable. 

Item 5. Other Information
 
None.




Item 6. Exhibits
 
Exhibits
 
Exhibit 31.1*
 
Certification of Chief Executive Officer
 
 
 
Exhibit 31.2*
 
Certification of Chief Financial Officer
 
 
 
Exhibit 32.1**
 
Section 1350 Certification of Chief Executive Officer
 
 
 
Exhibit 32.2**
 
Section 1350 Certification of Chief Financial Officer
 
 
 
Exhibit 101
 
The following materials from Brookline Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (1) Unaudited Consolidated Balance Sheets as of March 31, 2016 and March 31, 2015; (2) Unaudited Consolidated Statements of Income for the three months March 31, 2016 and March 31, 2015; (3) Unaudited Consolidated Statements of Comprehensive Income for the three months March 31, 2016 and March 31, 2015; (4) Unaudited Consolidated Statements of Changes in Equity for the three months ended March 31, 2016 and March 31, 2015; (5) Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and March 31, 2015; and (6) Notes to Unaudited Consolidated Financial Statements at and for the three months ended March 31, 2016 and March 31, 2015.
 

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Filed herewith.
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Furnished herewith.



SIGNATURES
 
Pursuant to the requirements 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: May 9, 2016
By:
/s/ Paul A. Perrault
 
 
Paul A. Perrault
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
 
Date: May 9, 2016
By:
/s/ Carl M. Carlson
 
 
Carl M. Carlson
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)