SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to______________.
Commission file number 0-23695
Brookline Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts
04-3402944
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
160 Washington Street, Brookline, MA
02447-0469
(Address of principal executive offices)
(Zip Code)
(617) 730-3500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.
YES ý NO o
Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date.
Common Stock, $0.01 par value - 26,873,317 shares outstanding as of November 7, 2001.
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Index
Part I
Financial Information
Item 1.
Financial Statements
Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000
Consolidated Statements of Income for the three months and nine months ended September 30, 2001 and 2000
Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2001 and 2000
Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2001 and 2000
Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000
Notes to Unaudited Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks
Part II
Other Information
Legal Proceedings
Changes in Securities
Defaults Upon Senior Securities
Item 4.
Submission of Matters to a Vote of Security Holders
Item 5.
Item 6.
Exhibits and Reports on Form 8-K
Signature Page
Part I - - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
(In thousands except share data)
September 30,
December 31,
2001
2000
(unaudited)
Assets
Cash and due from banks
$
12,919
13,505
Short-term investments
26,963
66,870
Securities available for sale
159,623
149,361
Securities held to maturity (market value of $17,253 and $50,337, respectively)
16,981
50,447
Restricted equity securities
9,187
7,145
Loans, excluding money market loan participations
843,294
716,559
Money market loan participations
26,000
28,250
Allowance for loan losses
(15,261
)
(14,315
Net loans
854,033
730,494
Other investment
3,622
3,360
Accrued interest receivable
5,664
6,521
Bank premises and equipment, net
2,006
3,768
Other real estate owned
143
-
Deferred tax asset
4,984
3,999
Other assets
566
680
Total assets
1,096,691
1,036,150
Liabilities and Stockholders’ Equity
Deposits
614,739
608,621
Borrowed funds
176,241
133,400
Mortgagors' escrow accounts
4,617
3,762
Income taxes payable
4,086
169
Accrued expenses and other liabilities
8,992
7,613
Total liabilities
808,675
753,565
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued
Common stock, $.01 par value; 45,000,000 shares authorized, 29,692,995 shares and 29,641,500 shares issued, respectively
297
296
Additional paid-in capital
140,944
140,327
Retained earnings
173,549
165,210
Accumulated other comprehensive income
6,314
6,244
Treasury stock, at cost - 2,473,678 shares and 2,185,928 shares, respectively
(27,031
(22,987
Unearned compensation - recognition and retention plan
(945
(1,070
Unallocated common stock held by ESOP - 428,708 shares and 455,771 shares, respectively
(5,112
(5,435
Total stockholders’ equity
288,016
282,585
Total liabilities and stockholders’ equity
See accompanying notes to the unaudited consolidated financial statements.
Consolidated Statements of Income
Three months ended
Nine months ended
Interest income:
15,901
14,231
46,374
41,114
111
694
919
1,322
Debt securities
2,511
2,692
7,932
8,279
Marketable equity securities
153
210
530
126
373
348
257
198
1,678
657
Total interest income
19,059
18,151
57,806
52,414
Interest expense:
5,694
5,825
18,843
16,695
2,503
1,908
6,707
5,241
Total interest expense
8,197
7,733
25,550
21,936
Net interest income
10,862
10,418
32,256
30,478
Provision for loan losses
275
69
934
369
Net interest income after provision for loan losses
10,587
10,349
31,322
30,109
Non-interest income:
Fees and charges
508
248
1,153
671
Gains on securities, net
871
2,316
3,178
6,459
Other real estate owned income, net
18
83
Gain from termination of pension plan
3,667
Swap contract market valuation adjustment
(230
(319
Other income
123
100
310
331
Total non-interest income
1,272
2,682
7,989
7,544
Non-interest expense:
Compensation and employee benefits
2,200
2,056
6,802
5,507
Recognition and retention plan
42
365
125
1,132
Occupancy
295
280
872
687
Equipment and data processing
898
568
2,645
1,224
Advertising and marketing
238
948
1,008
1,584
Internet bank start-up
746
Restructuring charge
3,912
Other
456
493
1,607
1,347
Total non-interest expense
4,129
4,710
16,971
12,227
Income before income taxes
7,730
8,321
22,340
25,426
Provision for income taxes
2,801
2,955
8,347
8,974
Net income
4,929
5,366
13,993
16,452
Weighted average common shares outstanding during the period:
Basic
26,778,953
26,733,313
26,837,300
26,888,976
Diluted
27,161,553
26,766,165
27,139,594
Earnings per common share:
0.18
0.20
0.52
0.61
Consolidated Statements of Comprehensive Income
(In thousands)
Other comprehensive income, net of taxes:
Unrealized holding gains
337
4,870
3,240
4,281
Income tax expense
150
1,787
1,206
1,571
Net unrealized holding gains
187
3,083
2,034
2,710
Less reclassification adjustment for gains included in net income:
Realized gains
314
845
1,214
2,344
Net reclassification adjustment
557
1,471
1,964
4,115
Total other comprehensive income (loss)
(370
(1,612
70
(1,405
Comprehensive income
4,559
6,978
14,063
15,047
Consolidated Statements of Changes in Stockholders’ Equity
Nine Months Ended September 30, 2001 and 2000 (Unaudited)
(Dollars in thousands)
Common stock
Treasury stock
Unearned compensation- recognition and retention plan
Unallocated common stock held by ESOP
Balance at December 31, 1999
140,355
150,098
7,759
(16,334
(2,316
(5,058
274,800
Unrealized loss on securities available for sale, net of reclassification adjustment
Common stock dividends of $0.12 per share.
(4,903
Treasury stock purchases (648,728 shares)
(6,164
Compensation under recognition and retention plan
Common stock acquired by ESOP (84,386 shares)
(802
Common stock held by ESOP committed to be released(26,856 shares)
(26
323
Balance at September 30, 2000
140,329
161,647
6,354
(22,498
(1,184
(5,537
279,407
Balance at December 31, 2000
Unrealized gain on securities available for sale, net ofreclassification adjustment
Common stock dividend of $0.30 per share
(5,654
Exercise of stock options (51,495 shares)
1
556
Treasury stock purchases (287,750 shares).
(4,044
Common stock held by ESOP committed to be released(27,063 shares)
61
384
Balance at September 30, 2001
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Release of ESOP shares
Depreciation and amortization
891
559
Write-off of premises and equipment included in restructuring charge
1,549
Amortization, net of accretion, of securities premiums and discounts
191
737
Accretion of deferred loan origination fees and unearned discounts
(205
(361
Net gains from sales of securities available for sale
(3,673
(6,459
Write-down in carrying value of a debt security available for sale
495
Net gains from sales of other real estate owned
(28
Equity interest in earnings of other investment
(262
(241
Swap market valuation charge
319
Deferred income taxes
(977
(713
(Increase) decrease in:
857
(132
114
(614
Increase in:
3,917
338
1,060
796
Net cash provided by operating activities
19,712
12,132
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale
5,492
10,121
Proceeds from redemptions and maturities of securities available for sale
25,609
43,216
Proceeds from redemptions and maturities of securities held to maturity
33,298
41,625
Purchase of securities available for sale
(38,146
(60,433
Purchase of Federal Home Loan Bank of Boston stock
(2,042
(616
Net increase in loans
(139,111
(64,224
Proceeds from sales of participation in loans
12,450
11,978
Purchase of bank premises and equipment
(678
(2,443
Proceeds from sales of other real estate owned
189
Net cash used for investing activities
(103,128
(20,587
Cash flows from financing activities:
Increase in demand deposits and NOW, savings and money market savings accounts
56,037
21,755
Increase (decrease) in certificates of deposit
(49,919
12,779
Proceeds from Federal Home Loan Bank of Boston advances
56,200
33,900
Repayment of Federal Home Loan Bank of Boston advances
(13,359
(12,300
Increase in mortgagors’ escrow accounts
855
563
Exercise of stock options
Purchase of common stock for ESOP
Purchase of treasury stock
Payment of dividends on common stock
Net cash provided by financing activities
40,673
44,828
Net increase (decrease) in cash and cash equivalents
(42,743
36,373
Cash and cash equivalents at beginning of period
108,625
33,038
Cash and cash equivalents at end of period
65,882
69,411
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds
25,284
21,835
Income taxes
5,145
9,334
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2001 and 2000
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included. Results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. Certain prior period amounts have been reclassified to conform to current period presentation.
(2) Lighthouse Bank (Dollars in Thousands)
On April 12, 2000, the Company received regulatory approval for Lighthouse Bank (“Lighthouse”) to commence operations as New England’s first-chartered internet-only bank. In connection with the legal formation of Lighthouse, the Company made a $25,000 capital investment in Lighthouse at the beginning of May 2000. Lighthouse commenced doing business with the public in the last week of June 2000. Expenses incurred prior to the legal incorporation of Lighthouse (April 27, 2000) were considered to have been start-up expenses. In April 2001, the Company announced the decision to either sell Lighthouse to a third party or merge it into Brookline Savings Bank (“Brookline”). That decision had been reached after determining the amount of additional operating losses Lighthouse would likely incur before achieving satisfactory profitability. On July 17, 2001, Lighthouse was converted from a state to a federal charter and merged into Brookline.
A summary of Lighthouse start-up and operating expenses from its inception to the date of its merger into Brookline is as follows:
Operating expenses
July 1 through July 17, 2001
Three months ended September 30, 2000
Compensation and benefits
93
460
12
71
239
16
772
27
171
1,713
Start-up expenses four months ended April 30, 2000
January 1 through July 17, 2001
Five months ended September 30, 2000
1,231
747
409
110
105
1,088
302
45
474
1,048
97
Professional services
51
58
327
161
32
3,230
2,420
Certain operating expenses associated with servicing former Lighthouse customers, including employee stay bonuses, were incurred through the third quarter of 2001. As of September 17, 2001, Lighthouse customers accounts were transferred to Brookline’s systems and records. In contemplation of the merger of Lighthouse into Brookline, a pre-tax restructuring charge of $3,912 was recorded in the second quarter of 2001 to provide for merger-related expenses. Those expenses included the following:
Personnel severance payments
1,247
Vendor contract terminations
619
Occupancy rent obligations
Write-off of equipment and software
1,551
Other miscellaneous items
176
(3) Business Segments (Dollars in Thousands)
Through July 17, 2001, the Company’s wholly-owned bank subsidiaries, Brookline and Lighthouse, collectively “the Banks”, were identified as reportable operating segments in accordance with the provisions of SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information”. The Brookline operating segment includes its wholly-owned subsidiaries. The “All Other” segment presented below includes the Company and its wholly-owned securities corporation.
The primary activities of the Banks through July 17, 2001 included acceptance of deposits from the general public, origination of mortgage loans on residential and commercial real estate, commercial and consumer loans, and investment in debt securities, mortgage-backed securities and other financial instruments. Brookline conducted its business primarily through its branch network while Lighthouse conducted its business primarily through the internet. As stated in note 2 herein, Lighthouse was merged into Brookline on July 17, 2001.
The Company and the Banks follow generally accepted accounting principles as described in the summary of significant accounting policies. Income taxes are provided in accordance with tax allocation agreements between the Company and the Banks. Intercompany expenditures are allocated based on actual or estimated costs. Consolidation adjustments reflect elimination of intersegment revenue and expenses and balance sheet accounts.
The following table sets forth certain information about and the reconciliation of reported net income for each of the reportable segments.
Brookline
Lighthouse *
Allother
Consolidationadjustments
Consolidated
At or for the three months
ended September 30, 2001
Interest income
18,334
224
4,676
(4,175
Interest expense
8,287
(190
Securities gains
511
360
Other non-interest income
308
8
117
(32
401
Other non-interest expense
3,840
41
Income tax expense (benefit)
2,411
(41
431
Net income (loss)
4,340
(75
4,681
(4,017
Total loans, excluding money
market loan participations
Total deposits
621,436
(6,697
1,054,577
299,263
(257,149
* Operating results are for the period from July 1 through July 17, 2001.
Lighthouse
ended September 30, 2000
17,116
499
2,031
(1,495
7,833
95
(195
2,311
5
293
(29
366
Non-interest expense
2,941
56
3,106
(479
328
5,840
(889
1,744
(1,329
667,245
20,936
688,181
535,597
16,865
(5,792
546,670
890,844
40,234
285,956
(247,262
969,772
For the nine months
53,866
2,798
11,253
(10,111
24,934
1,577
(961
860
74
Securities gains (losses)
3,313
183
(135
(183
Pension plan gain
917
262
(96
1,144
9,530
299
13,059
9,962
(2,279
728
(64
16,477
(3,472
10,353
(9,365
49,835
744
25,565
(23,730
22,396
(555
300
6,454
909
254
(83
1,085
Start-up expenses
8,834
227
11,481
9,024
(953
903
16,644
(1,623
24,689
(23,258
(4) Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the periods presented. Diluted earnings per share gives effect to all dilutive potential shares resulting from options that were outstanding during the periods presented.
The components of basic and diluted earnings per share for the three months and nine months ended September 30, 2001 and 2000 are as follows:
Weighted:average shares
Net income per share
Three months
ended September 30
Effect of dilutive stock options
382,600
32,852
Dilutive
Nine months
302,294
(5) Accumulated Other Comprehensive Income (Dollars in Thousands)
Accumulated other comprehensive income is comprised entirely of unrealized gains on securities available for sale, net of income taxes. At September 30, 2001 and December 31, 2000, such taxes amounted to $3,633 and $3,641, respectively.
(6) Commitments and SWAP Agreement (Dollars in Thousands)
At September 30, 2001, the Company had outstanding commitments to originate loans of $40,915, $23,620 of which were commercial real estate and multi-family mortgage loans. Unused lines of credit available to customers were $22,782, $12,040 of which were equity lines of credit.
Effective April 14, 1998, the Bank entered into an interest-rate swap agreement with a third-party that matures April 14, 2005. The notional amount of the agreement is $5,000. Under this agreement, each quarter, the Bank pays interest on the notional amount at an annual fixed rate of 5.9375% and receives from the third-party interest on the notional amount at the floating three month U.S. dollar LIBOR rate. The Bank entered into this transaction to match more closely the repricing of its assets and liabilities and to reduce its exposure to increases in interest rates. The net interest income received (expense paid) for the nine months ended September 30, 2001 and 2000 was $(39) and $15, respectively.
Effective January 1, 2001, the Company adopted SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities”. That Statement requires the Company to recognize all derivatives as either assets or liabilities in its balance sheet and to measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. The Company’s interest-rate swap agreement did not meet the criteria to designate it as a hedging instrument. Accordingly, changes in the fair value of the outstanding swap agreement are recognized as charges or credits to earnings. The pre-tax unrealized loss of $20 in the swap agreement as of January 1, 2001 was not accounted for as the effect of a change in accounting principle due to immateriality. Instead, that amount was included in the pre-tax charge to earnings of $142 for the three months ended March 31, 2001 resulting from accounting for the swap agreement on a fair value basis. For the three month and nine month periods ended September 30, 2001, $230 and $319, respectively, were charged to pre-tax earnings for those periods as a result of accounting for the swap agreement on a fair value basis.
(7) Dividend Declaration
The Board of Directors of the Company approved a quarterly dividend of $0.16 per share of common stock to stockholders of record as of October 31, 2001 and payable November 15, 2001. Brookline Bancorp, MHC (“MHC”), the majority stockholder of the Company, waived receipt of this dividend on the shares it owns of the Company’s common stock. The Office of Thrift Supervision ("OTS") expressed no objection to this waiver of dividends.
(8) 1999 Stock Option Plan and 1999 Recognition and Retention Plan (Dollars in Thousands)
On April 15, 1999, the stockholders approved the Company’s 1999 Stock Option Plan (the “Stock Option Plan”) and the 1999 Recognition and Retention Plan (the “RRP”).
Under the Stock Option Plan, 1,367,465 shares of the Company’s common stock were reserved for issuance to officers, employees and non-employee directors of the Company. Shares issued upon the exercise of a stock option may be either authorized but unissued shares or reacquired shares held by the Company as treasury shares. Any shares subject to an award which expires or is terminated unexercised will again be available for issuance under the Stock Option Plan. On April 19, 1999, 1,265,500 options were awarded to officers and non-employee directors of the Company at an exercise price of $10.8125 per share, the fair market value of the common stock of the Company on that date. Of the total options awarded, 410,460 options were incentive stock options and 855,040 options were non-qualified stock options. Options awarded vest over periods ranging from less than six months through five years. As of September 30, 2001, 839,200 options had vested, 21,000 options were forfeited and 51,495 incentive options were exercised.
Under the RRP, 546,986 shares of the Company’s common stock were reserved for issuance as restricted stock awards to officers, employees and non-employee directors in recognition of prior service and as an incentive for such individuals to remain with the Company. Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company as treasury shares. Any shares not issued because vesting requirements are not met will again be available for issuance under the RRP. On April 19, 1999, 546,500 shares were awarded to officers and non-employee directors of the Company. As of September 30, 2001, 444,988 shares had vested and 3,850 shares had been forfeited . Expense is recognized for shares awarded over the vesting period at the fair market value of the shares on the date they were awarded, or $10.8125 per share. Expense for the nine months ended September 30, 2001 and 2000 was $125 and $1,132, respectively.
(9) Employee Stock Ownership Plan (Dollars in Thousands)
On March 24, 1998, the Board of Directors of Brookline approved an employee stock ownership plan (the “ESOP”). All Brookline employees meeting age and service requirements are eligible to participate in the ESOP. The ESOP purchased in the open market all of the 546,986 shares it was authorized to purchase at an aggregate cost of $6,598. The purchase of the shares was financed by a loan from the Company that is payable in quarterly installments over 30 years and bears interest at 8.50% per annum. The loan can be prepaid without penalty. Loan payments are principally funded by cash contributions from Brookline and dividends on unallocated shares of Company stock held by the ESOP, subject to IRS limitations.
For the nine months ended September 30, 2001 and 2000, $383 and $277, respectively, were charged to compensation and employee benefits expense based on the commitment to release 27,063 and 26,856 shares, respectively, to eligible employees.
(10) Pension Benefits (in Thousands)
On July 6, 2000, the Board of Directors of Brookline voted to terminate, effective September 30, 2000, Brookline’s defined benefit pension plan, a non-contributory qualified retirement plan for eligible employees (the “Plan”). In connection with the termination of the Plan, eligible employees were offered a single sum settlement equal to the value of their benefits under the Plan. In addition, a portion of the surplus of the Plan was used to enhance the benefits of eligible employees. Final Plan termination has been approved by the Internal Revenue Service and, as a result, a gain of $3,667 ($1,890 on an after-income tax basis) was recognized during the three months ended June 30, 2001.
Brookline established a defined contribution plan so that, effective January 1, 2001, it contributes an amount equal to 5% of the compensation of eligible employees. A similar defined contribution plan was established for Lighthouse employees effective May 1, 2000. The total amounts charged to earnings related to the pension plans for the nine months ended September 30, 2001 and 2000 were $201 and $28, respectively.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Mutual Holding Company Structure
Brookline Bancorp, Inc. (the “Company”) was organized in November 1997 for the purpose of acquiring all of the capital stock of Brookline Savings Bank (“Brookline”) upon completion of Brookline’s reorganization from a mutual savings bank into a mutual holding company structure. As part of the reorganization, the Company offered for sale 47% of the shares of its common stock in an offering fully subscribed for by eligible depositors of Brookline (the “Offering”). The remaining 53% of the Company’s shares of common stock were issued to Brookline Bancorp MHC (“MHC”), a state-chartered mutual holding company incorporated in Massachusetts. The reorganization and Offering were completed on March 24, 1998. At September 30, 2001, the MHC owned 56.65% of the Company’s outstanding common stock.
Conversion to a Federal Charter
On February 21, 2001, the Board of Directors approved a plan to convert the Company’s charter from a Massachusetts corporation regulated by the Massachusetts Division of Banks and the Board of Governors of the Federal Reserve System to a federal corporation regulated by the Office of Thrift Supervision (“OTS”). The charter conversion, which was approved by the stockholders of the Company on April 19, 2001, was approved by the OTS on July 16, 2001. The MHC, Brookline and Lighthouse Bank (“Lighthouse”) also received approval of their conversions from state to federal charters on that date.
Among other things, the charter conversions permit the MHC to waive the receipt of dividends paid by the Company without causing dilution to the ownership interests of the Company’s minority stockholders in the event of a conversion of the MHC to stock form. The waiving of dividends will increase Company resources available for stock repurchases, payment of dividends to minority stockholders and investments.
As part of the approval of the charter conversions, the OTS requires that the Company comply satisfactorily with several conditions, the most notable of which is that Brookline and its subsidiaries must divest themselves of their investment in marketable equity securities without material loss at the earliest possible date, but in any event no later than July 17, 2003. The divestiture can be accomplished by sale of the equity securities or their transfer to the Company or its subsidiary. At September 30, 2001, Brookline and its subsidiaries owned equity securities with a market value of $8.5 million.
As a federally-chartered institution, Brookline will be required to meet a qualified thrift lender test. Under that test, an institution is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets minus goodwill and other intangible assets, office property and specified liquid assets up to 20% of total assets) in certain “qualified thrift investments” (primarily loans to purchase, refinance, construct, improve or repair domestic residential housing, home equity loans, securities backed by or representing an interest in mortgages on domestic residential housing, and Federal Home Loan Bank stock) in at least nine months out of each twelve month period. A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. The OTS has granted Brookline an exception from the qualified thrift lender test through July 17, 2002. At September 30, 2001, Brookline maintained approximately 65.5% of its portfolio assets in qualified thrift investments.
On April 12, 2000, the Company received regulatory approval for Lighthouse to commence operations as New England’s first-chartered internet-only bank. The Company made a $25 million capital investment in Lighthouse at the beginning of May 2000. See notes 2 and 3 of the notes to the unaudited consolidated financial statements on pages 8 through 10 herein for information about the start-up expenses and operating results of Lighthouse.
In April 2001, the Company announced the decision to either sell Lighthouse to a third party or merge it into Brookline. That decision had been reached after determining the amount of additional operating losses Lighthouse would likely incur before achieving satisfactory profitability. On July 17, 2001, the existence of Lighthouse as a separate corporate entity was terminated by its merger into Brookline. Brookline will continue to provide on-line electronic banking services to the former customers of Lighthouse.
In contemplation of the merger, a pre-tax restructuring charge of $3.9 million was recorded in the second quarter of 2001 to provide for merger-related expenses. Those expenses included personnel severance payments, termination of contracts with third party vendors, occupancy rent obligations, write-off of equipment and software, and other miscellaneous items. Certain operating expenses associated with servicing former Lighthouse customers continued through the third quarter of 2001. As of September 17, 2001, Lighthouse customers accounts were transferred to Brookline’s systems and records.
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company’s actual results to differ materially from those contemplated by such forward-looking statements. These important factors include, without limitation, Brookline’s continued ability to originate quality loans, fluctuation of interest rates, real estate market conditions in Brookline’s lending areas, general and local economic conditions, the continued ability of Brookline to attract and retain deposits, the Company’s ability to control costs, new accounting pronouncements and changing regulatory requirements.
Comparison of Financial Condition at September 30, 2001 and December 31, 2000
Total assets increased $60.5 million, or 5.8%, from $1.036 billion at December 31, 2000 to $1.097 billion at September 30, 2001. Excluding money market loan participations, the loan portfolio amounted to $843.3 million at September 30, 2001, an increase of $126.7 million, or 17.7% since December 31, 2000 and $26.2 million, or 3.2%, since June 30, 2001. Over 50% of the loan growth over the past nine months was in the residential mortgage loan sector, much of which occurred through real estate broker relationships with Lighthouse. Loan growth at Brookline was primarily in the multi-family and commercial real estate mortgage sectors. The level of loan growth, especially in the residential mortgage loan sector, declined in the third quarter and is expected to decline further in the fourth quarter of this year. With the merger of Lighthouse into Brookline, reliance on real estate brokers to provide new residential mortgage loans has been greatly diminished.
Money market loan participations declined from $28.3 million at December 31, 2000 to $26.0 million at September 30, 2001. Generally, the participations represent purchases of a portion of loans to national companies and organizations originated and serviced by money center banks that mature between one day and three months. The Company views such participations as an alternative to lower yielding short-term investments.
Short-term investments declined $39.9 million since December 31, 2000 to $27.0 million at September 30, 2001 and securities available for sale and held to maturity declined $23.2 million since December 31, 2000 to $176.6 million at September 30, 2001. Investment redemptions were used to fund part of the loan growth. Over the last nine months, investment in corporate obligations declined $28.8 million to $64.7 million while investment in collateralized mortgage obligations increased $11.8 million to $82.4 million. Most of the corporate obligations mature within two years and the collateralized mortgage obligations generally mature within three or four years.
Total deposits were $614.7 million at September 30, 2001 compared to $618.6 million at June 30, 2001 and $608.6 million at December 31, 2000. During the past nine months, transaction deposit accounts increased $56.0 million, $21.4 million of which related to Lighthouse accounts. Offsetting much of this increase was a $49.9 million decrease in certificates of deposit, $20.5 million of which related to Lighthouse accounts. Much of decline resulted from the maturity of high yielding certificates of deposit obtained primarily through special promotions in the fourth quarter of 2000.
Total borrowed funds were $176.2 million at September 30, 2001 compared to $156.3 million at June 30, 2001 and $133.4 million at December 31, 2000. All of the borrowed funds were obtained through advances from the Federal Home Loan Bank of Boston ("FHLB"). The borrowings were used to fund loan growth and in connection with the Company's management of the interest rate sensitivity of its assets and liabilities.
Total stockholders' equity increased from $282.6 million at December 31, 2000 to $288.0 million at September 30, 2001. Between those dates, the Company repurchased 287,750 shares of its common stock at an aggregate cost of $4.0 million, or $14.05 per share. As of September 30, 2001, the Company can purchase an additional 1,322,525 shares under a new repurchase plan approved by the Board of Directors on September 19, 2001. During the most recent quarter, the exercise of 51,495 incentive stock options resulted in capital proceeds of $557,000.
Unrealized gains on securities available for sale are reported as accumulated other comprehensive income. Such gains were $9.9 million ($6.3 million on an after-tax basis) at September 30, 2001 and $9.9 million ($6.2 million on an after-tax basis) at December 31, 2000. Between those dates, gains of $3.7 million ($2.5 million on an after-tax basis) were realized from the sale of marketable equity securities and a write-down of $495,000 ($318,000 on an after-tax basis) in the carrying value of a defaulted debt security was recorded.
Non-Performing Assets, Restructured Loans and Allowance for Loan Losses
The following table sets forth information regarding non-performing assets, restructured loans and the allowance for loan losses:
September 30,.2001
December 31,.2000
Non-accrual loans
3
Property in possession
Defaulted corporate debt security
1,440
Total non-performing assets
1,586
Restructured loans
15,261
14,315
Allowance for loan losses as a percent of total loans
1.76
%
1.92
Allowance for loan losses as a percent of total loans, excluding money market loan participations
1.81
2.00
Non-accrual loans as a percent of total loans
Non-performing assets as a percent of total assets
0.14
In addition to identifying non-performing loans, the Company identifies loans that are characterized as “impaired” pursuant to generally accepted accounting principles. The definition of “impaired loans” is not the same as the definition of “non-accrual loans”, although the two categories tend to overlap. Impaired loans amounted to $105,000 at September 30, 2001 and $107,000 at December 31, 2000. None of the impaired loans at those dates required a specific allowance for impairment due primarily to prior charge-offs and the sufficiency of collateral values.
During the nine months ended September 30, 2001 and 2000, recoveries of loans previously charged off amounted to $12,000 and $18,000, respectively, and there were no loan charge-offs. Despite net loan recoveries and minimal non-performing loans at September 30, 2001, the Company increased its allowance for loan losses by providing $934,000 and $369,000 as charges to earnings in the first nine months of 2001 and 2000, respectively. Management deemed it prudent to increase the allowance in light of the $126.6 million and $52.6 million increase in net loans outstanding in the first nine months of 2001 and 2000, respectively (exclusive of money market loan participations). Over 50% of the net loan growth in the first nine months of 2001 and 2000 was in residential mortgage loans. While management believes that, based on information currently available, the allowance for loan losses is sufficient to cover losses inherent in the Company’s loan portfolio at this time, no assurance can be given that the level of allowance will be sufficient to cover future loan losses or that future adjustments to the allowance will not be necessary if economic and/or other conditions differ substantially from the economic and other conditions considered by management in evaluating the adequacy of the current level of the allowance.
In the second quarter of 2001, the Company charged earnings $495,000 to recognize an other than temporary impairment in the carrying value of a $2.0 million bond issued by Southern California Edison that matured on June 1, 2001. Interest of $65,000 due on the bond was received at the maturity date and applied as a reduction of the carrying value of the bond instead of being credited to interest income. Repayment of the debt security will depend on resolution of issues related to the energy crisis in California.
Comparison of Operating Results for the Three Months Ended September 30, 2001 and 2000
General
Operating results are primarily dependent on the Company's net interest income, which is the difference between interest earned on the Company's loan and investment portfolios and interest paid on deposits and borrowings. Operating results are also affected by provisions for loan losses, the level of income from non-interest sources such as service fees and sale of investment securities and other assets, operating expenses and income taxes. Operating results are also affected significantly by general economic conditions, particularly changes in interest rates, as well as governmental policies and actions of regulatory authorities.
Net income for the three months ended September 30, 2001 was $4.9 million, or $0.18 per share, compared to $5.4 million, or $0.20 per share, for the three months ended September 30, 2000. Basic and diluted earnings per share were the same in each of the three month periods. The 2001 and 2000 quarters included net securities gains of $871,000 ($557,000 on an after-tax basis, or $0.02 per share) and $2.3 million ($1.5 million on an after-tax basis, or $0.05 per share), respectively, and expense of $42,000 ($24,000 on an after-tax basis) and $365,000 ($212,000 on an after-tax basis), respectively, related to the recognition and retention plan ("RRP") approved by stockholders.
The 2001 and 2000 quarters also included after-tax net operating losses of approximately $320,000 ($0.01 per share and $889,000 ($0.03 per share), respectively, related to Lighthouse. Lighthouse was merged into Brookline on July 17, 2001. The 2001 estimated quarterly loss included operating expenses associated with servicing former Lighthouse customers from July 17 through the end of the quarter. The transfer of Lighthouse accounts to Brookline's systems and records was completed by the end of September 2001. See notes 2 and 3 of the notes to the unaudited consolidated financial statements on pages 8 through 10 herein for additional information about the operating results of Lighthouse.
Average Balance Sheets and Interest Rates
The following table sets forth certain information relating to the Company for the three months ended September 30, 2001 and 2000. The average yields and costs were derived by dividing interest income or interest expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods shown. Average balances were derived from daily average balances. The yields and costs include fees which are considered adjustments to yields.
Three months ended September 30,
Average yield/cost
Average balance
Interest(1
Assets:
Interest-earning assets:
28,115
3.63
12,057
6.48
Debt securities (2)
164,750
6.10
170,533
6.31
Equity securities (2)
30,592
335
4.38
30,652
412
5.38
Mortgage loans (3)
803,307
15,370
7.65
650,693
13,660
8.40
11,852
3.75
40,426
6.81
Other commercial loans (3)
27,793
454
6.53
24,564
520
8.47
Consumer loans (3)
3,171
77
9.71
2,023
10.08
Total interest-earning assets
1,069,580
19,115
7.15
930,948
18,227
7.83
(15,070
(14,253
Non-interest earning assets
30,655
29,691
1,085,165
946,386
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Deposits:
NOW accounts
69,862
229
1.30
50,597
172
1.35
Savings accounts (4)
12,810
1.80
12,172
67
2.18
Money market savings accounts
251,854
2,092
3.30
206,887
2,052
3.94
Certificate of deposit accounts
262,284
3,315
5.02
249,075
3,534
5.63
596,810
3.79
518,731
4.46
163,802
6.06
123,325
6.14
Total interest bearing liabilities
760,612
4.28
642,056
4.78
Non-interest-bearing demand checking accounts
18,382
Other liabilities
16,974
11,701
795,968
668,804
Stockholders’ equity
289,197
277,582
Net interest income (tax equivalent basis)/interest rate spread (5)
10,918
2.87
10,494
3.05
Less adjustment of tax exempt income
76
Net interest margin (6)
4.08
4.51
(1) Tax exempt income on equity securities is included on a tax equivalent basis.
(2) Average balances include unrealized gains on securities available for sale. Equity securities include marketable equity securities (preferred and common stocks) and restricted equity securities.
(3) Loans on non-accrual status are included in average balances.
(4) Savings accounts include mortgagors' escrow accounts.
(5) Net interest spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(6) Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.
Average earning assets were $138.6 million, or 14.9%, higher in the third quarter of 2001 compared to the third quarter of 2000. Average deposits increased $78.1 million, or 15.1%, and average borrowed funds increased $40.5 million, or 32.8%, between the three month periods. About half of the loan growth and much of the deposit growth was attributable to the activities of Lighthouse.
While interest rate spread declined from 3.05% in the third quarter of 2000 to 2.87% in the third quarter of 2001, it increased from the 2.68% and 2.79% spreads realized in the first and second quarters of 2001. The improved spreads in 2001 resulted in part from loan growth as the percent of average loans outstanding to the total of all earning assets outstanding grew from 70% in the first quarter of 2001 to 78% in the third quarter of 2001. Generally, yields on loans exceed yields on the Company's short-term investments and investment securities. Also contributing to the improved spread was a faster level of decline in the average rate paid on interest-bearing liabilities (especially certificates of deposit) since March 31, 2001 (65 basis points) than in the decline in the average rate earned on loans and investments since that date (46 basis points).
Interest rates earned and paid are influenced greatly by the actions of the Federal Reserve in establishing the benchmark federal funds interest rate for overnight loans between banks. In each of the first two quarters of 2000, the federal funds rate was increased by 50 basis points. In 2001, the federal funds rate was reduced 150 basis points in the first quarter, 125 basis points in the second quarter, 75 basis points in the third quarter and 50 basis points on October 2. The 2001 reductions represent the most aggressive pace of cuts by the Federal Reserve since 1982 and the latest cut resulted in the lowest rate since May 1962. The impact of rate changes on operating results varies depending on the maturity and date of repricing of the Company's loans, investment securities, deposits and borrowed funds.
It is expected that the rate reductions initiated by the Federal Reserve in 2001 will continue to cause a decline in the average yield on the Company's earning assets. That portion of the Company's loan portfolio that is priced on an adjustable rate basis will experience rate reductions while that portion of the loan portfolio priced at fixed rates could experience loan prepayments and refinancings. The Company's investment portfolio will likely experience a decline in yields earned since most of the investments mature within relatively short time periods.
It is also expected that rates paid on deposits and borrowed funds will decline. The extent and frequency with which the repricing of deposits can take place varies by deposit product. For example, the extent to which the pricing of NOW accounts and savings accounts can be reduced in a significant declining environment is limited because of the lower rates typically paid on those deposits. With respect to certificates of deposit and borrowed funds, changes in rates paid can be significant, but the impact of the changes depends on when the certificates and borrowings are initiated and mature.
As of September 30, 2001, the aggregate amount of the Company's interest-bearing liabilities either maturing or subject to repricing within three months exceeded the aggregate amount of the Company's interest-earning assets maturing or subject to repricing within three months by $157.1 million, or 14.3% of total assets. This is referred to as a negative gap position. Based on assets and liabilities at September 30, 2001 maturing or subject to repricing within one year, the Company had a negative gap position of $154.8 million, or 14.1% of total assets. Based on these gap positions, the Company's interest rate spread should improve in the fourth quarter of 2001 over that achieved in the third quarter of 2001. There can be no assurance, however, concerning this forecast since actual results will depend on various economic factors outside the control of the Company.
Interest Income
Interest income on loans, excluding money market loan participations, was $15.9 million in the 2001 quarter compared to $14.2 million in the 2000 quarter, an increase of $1.7 million, or 11.7%. The additional income resulting from an increase in average loans outstanding of $157.0 million, or 23.2%, was offset in part by a decline in the average yield on loans from 8.40% in the 2000 quarter to 7.62% in the 2001 quarter.
The average balances invested in short-term investments in the third quarter of 2001 and 2000 were $28.1 million and $12.1 million, respectively, and the yields earned on those balances were 3.63% and 6.48%, respectively. The average balances invested in money market loan participations in the third quarter of 2001 and 2000 were $11.9 million and $40.4 million, respectively, and the yields on those balances were 3.75% and 6.81%, respectively. The lower yields were attributable to the federal funds rate reductions by the Federal Reserve previously mentioned herein.
Interest income on debt securities was $2.5 million in the 2001 quarter and $2.7 million in the 2000 quarter as a result of a decline in the average balances invested ($164.8 million compared to $170.5 million) and a decline in the yield earned (6.10% compared to 6.31%).
Interest Expense
Interest expense on deposits was $5.7 million in the 2001 quarter, a 2.2% decline from the $5.8 million expended in the 2000 quarter. The increase in interest expense resulting from higher average deposit balances ($596.8 million compared to $518.7 million) was more than offset by the effect of the lower average rates paid on those deposits (3.79% compared to 4.46%).
Average borrowings from the FHLB increased from $123.3 million in the 2000 quarter to $163.8 million in the 2001 quarter. The average rates paid on those balances were 6.06% and 6.14%, respectively.
Provision for Loan Losses
The provision for loan losses charged to earnings was $275,000 in the 2001 quarter and $69,000 in the 2000 quarter. The increase was attributable to growth of the loan portfolio.
Non-Interest Income
Gains on sales of marketable equity securities were $871,000 in the 2001 quarter and $3.2 million in the 2000 quarter. Marketable equity securities are held by the Company primarily for capital appreciation and not for trading purposes. Gains in the future, if any, will be highly dependent on factors outside the control of the Company and, accordingly, cannot be assured.
Fees and charges increased from $248,000 in the 2000 quarter to $508,000 in the 2001 quarter primarily as a result of a $218,000 increase in mortgage loan prepayment fees and higher deposit service fees.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". In connection with accounting for an outstanding swap agreement on a fair value basis, $230,000 was charged to earnings in the third quarter of 2001. See note 6 of the notes to the unaudited consolidated financial statements on pages 11 and 12 herein for additional information regarding this matter.
Non-Interest Expense
As explained in notes 2 and 3 of the notes to the unaudited consolidated financial statements on pages 8 through 10 herein, Lighthouse was merged into Brookline on July 17, 2001. From that date, expenses related to the continued servicing of former Lighthouse accounts were charged to Brookline. The total of Lighthouse-related expenses charged to Lighthouse and Brookline during the third quarter of 2001 amounted to $1.1 million. The total of Lighthouse expenses in the third quarter of 2000 amounted to $1.7 million. Expenses to be paid by Brookline in the fourth quarter of 2001 to serve former Lighthouse customers are expected to decline significantly from the level incurred in the third quarter.
Expense related to the RRP amounted to $42,000 in the 2001 quarter and $365,000 in the 2000 quarter. (See note 8 of the notes to the unaudited consolidated financial statements on page 12 herein). Excluding RRP and Lighthouse-related expenses, total non-interest expense increased $393,000, or 14.9%, from $2.6 million in the 2000 quarter to $3.0 million in the 2001 quarter. More than half of the increase ($217,000) related to personnel costs. Replacement of Brookline's defined benefit pension plan with a defined contribution plan resulted in a $54,000 increase in pension expense and the expense of the ESOP (which is determined by the market value of the Company's stock) increased $36,000. Equipment and data processing costs increased $111,000 due primarily to higher website and ATM servicing fees and higher costs related to new teller platform and asset/liability management software, and equipment purchased for a new branch. Higher costs were also incurred for regulatory assessments due to the change to a federal charter and occupancy due to the addition of a new branch and rent escalations on existing premises.
Income Taxes
The effective rate of income taxes was 36.2% in the 2001 quarter compared to 35.5% in the 2000 quarter. The slight increase was attributable to the application of varying state income tax rates to the earnings of the Company's subsidiaries.
Comparison of Operating Results for the Nine Months Ended September 30, 2001 and 2000
Net income for the nine months ended September 30, 2001 was $14.0 million, or $0.52 per share, compared to $16.5 million, or $0.61 per share, for the nine months ended September 30, 2000. Basic and diluted earnings per share were the same for each of the nine month periods. The 2001 period included net securities gains of $3.2 million ($2.0 million on an after-tax basis, or $0.07 per share) and the 2000 period included net securities gains of $6.5 million ($4.1 million on an after-tax basis, or $0.15 per share). Expenses related to the RRP in the 2001 and 2000 periods were $125,000 and $1.1 million, respectively ($72,000 and $659,000, respectively, on an after-tax basis).
Both the 2001 and 2000 periods included after-tax net operating losses of approximately $1.6 million, or $0.06 per share related to Lighthouse. (The net operating loss for the 2001 period includes Lighthouse-related activities subsequent to the merger of Lighthouse into Brookline on July 17, 2001. See notes 2 and 3 of the notes to the unaudited consolidated financial statements on pages 8 through 10 herein and "Comparison of Operating Results for the Three Months Ended September 30, 2001 and 2000 - Non-Interest Expense" on page 20 herein for additional information regarding this matter).
The 2001 period also included a restructuring charge of $3.9 million ($2.3 million on an after-tax basis, or $0.08 per share) recorded in the second quarter of 2001 in contemplation of the merger of Lighthouse into Brookline. The restructuring charge was partly offset by a gain of $3.7 million ($1.9 million on an after-tax basis, or $0.07 per share) from termination of Brookline's defined benefit pension plan.
The following table sets forth certain information relating to the Company for the nine months ended September 30, 2001 and 2000. Average balances were derived from daily average balances. The yields and costs include fees which are considered adjustments to yields.
Nine months ended September 30,
Interest(1)
39,564
1,424
4.80
14,414
658
6.09
175,147
8,186
6.23
181,753
6.07
1,096
4.76
31,117
1,294
5.54
Mortgage loans (3) (4)
752,152
44,680
7.92
633,890
39,475
8.30
23,009
5.33
26,860
6.56
27,015
1,475
7.28
24,543
1,517
8.24
2,897
219
1,969
146
9.89
1,050,436
57,999
7.36
914,546
52,691
7.68
(14,708
(14,080
29,501
25,895
1,065,229
926,361
68,233
695
1.36
48,449
461
1.27
Savings accounts (5)
12,309
178
1.93
12,253
202
2.20
235,222
6,292
3.57
205,805
6,055
3.92
Certificates of deposit accounts
284,178
11,678
5.48
245,052
9,977
5.43
599,942
4.19
511,559
4.35
145,563
115,243
Total interest-bearing liabilities
745,505
4.57
626,802
4.67
17,667
13,715
14,886
11,129
778,058
651,646
287,171
274,715
Net interest income (tax equivalent basis)/interest rate spread (6)
32,449
2.79
30,755
3.02
193
252
30,503
Net interest margin (7)
4.12
4.48
(4) Interest income in the 2000 period is increased by $25 for an interest rate adjustment on a loan that relates to prior periods.
(5) Savings accounts include mortgagors' escrow accounts.
(6) Net interest spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(7) Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.
Average earning assets were $135.9 million, or 14.9%, higher in the 2001 period compared to the 2000 period. Average deposits increased $88.4 million, or 17.3%, and average borrowed funds increased $30.3 million, or 26.3%, between the two periods. Over half of the loan growth was attributable to the activities of Lighthouse.
Interest rate spread declined from 3.02% in the 2000 period to 2.79% in the 2001 period. The decline resulted primarily from the effect of changes in the federal funds rate by the Federal Reserve prior to and during those periods. The federal funds rate was increased in the aggregate by 75 basis points in the last seven months of 1999 and 100 basis points in the first five months of 2000 and reduced in the aggregate by 400 basis points in 2001 (through October 2, 2001).
Interest income on loans, excluding money market loan participations, was $46.4 million in the 2001 period compared to $41.1 million in the 2000 period, an increase of $5.3 million, or 12.8%. The additional income resulting from an increase in average loans outstanding of $121.7 million, or 18.4%, was offset in part by a decline in the average yield on loans from 8.30% in the 2000 period to 7.91% in the 2001 period.
The average balances invested in short-term investments and money market loan participations during the 2001 period were $39.6 million and $23.0 million, respectively, and the yields on those balances were 4.80% and 5.33%, respectively. The average balances during the 2000 period were $14.4 million and $26.9 million, respectively, and the yields on those balance were 6.09% and 6.56%, respectively.
Interest income on debt securities declined slightly from $8.3 million in the 2000 period to $8.2 million in the 2001 period. Partly offsetting the reduction in income resulting from a $6.6 million, or 3.6% decline in the average balances invested in debt securities was an improvement in yield on the average balances from 6.07% in the 2000 period to 6.23% in the 2001 period. The yield enhancement resulted from investing a higher percent of the investment portfolio in collateralized mortgage obligations.
Interest expense on deposits was $18.8 million in the 2001 period, a 12.9% increase from the $16.7 million expended in the 2000 period. The increase was due to the growth in the average balance of interest-bearing deposits of $88.4 million, or 17.3%, over half of which took place at Lighthouse. Partly offsetting the effect of this increase was a reduction in the average rates paid on interest-bearing deposits from 4.35% in the 2000 period to 4.19% in the 2001 period.
Average borrowings from the FHLB increased from $115.2 million in the 2000 period to $145.6 million in the 2001 period. The average rates paid on those balances were 6.06% and 6.14%, respectively.
The provision for loan losses charged to earnings was $934,000 in the 2001 period and $369,000 in the 2000 period. The increase was attributable to growth of the loan portfolio.
Net securities gains were $3.2 million in the 2001 period and $6.5 million in the 2000 period. The 2001 period included a gain of $3.7 million from termination of Brookline's defined benefit pension plan. (See note 10 of the notes to the unaudited consolidated financial statements on page 13 herein).
Fees and charges increased from $671,000 in the 2000 period to $1.2 million in the 2001 period primarily as a result of a $306,000 increase in mortgage loan prepayment fees and higher deposit service fees. In the 2001 period, $319,000 was charged to earnings in connection with accounting for the Company's outstanding swap agreement on a fair value basis.
Excluding a restructuring charge of $3.9 million recorded in the second quarter of 2001 (see note 2 of the notes to the consolidated financial statements on pages 8 and 9 herein), the total of Lighthouse-related expenses charged to Lighthouse and Brookline during the 2001 period was $4.0 million compared to $3.2 million in the 2000 period. Expense related to the RRP amounted to $125,000 in the 2001 period and $1.1 million in the 2000 period.
Excluding RRP and Lighthouse-related expenses, total non-interest expense increased $961,000, or 12.1%, from $7.9 million in the 2000 period to $8.9 million in the 2001 period. More than half of the increase ($519,000) related to personnel costs. Replacement of Brookline's defined benefit pension plan with a defined contribution plan resulted in a $176,000 increase in pension expense and the expense of the ESOP increased $106,000. Equipment and data processing costs increased $277,000 and occupancy increased $147,000 primarily for the same reasons that caused the increases between the 2001 and 2000 third quarter periods.
The effective rate of income taxes was 37.4% in the 2001 period compared to 35.3% in the 2000 period. The increase in rate was attributable primarily to the non-deductibility of a $587,000 excise tax payable to the federal government in connection with the termination of Brookline's pension plan.
Asset/Liability Management
The Company's Asset/Liability Committee is responsible for managing interest rate risk and reviewing with the Board of Directors on a quarterly basis its activities and strategies, the effect of those strategies on the Company's operating results, the Company's interest rate risk position and the effect changes in interest rates would have on the Company's net interest income.
Generally, it is the Company's policy to reasonably match the rate sensitivity of its assets and liabilities. 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 the same time period. Also taken into consideration are interest rate swap agreements entered into by the Company. At September 30, 2001, interest-earning assets maturing or repricing within one year amounted to $386.9 million and interest-bearing liabilities maturing or repricing within one year amounted to $541.7 million resulting in a cumulative one year negative gap position of $154.8 million, or 14.1% of total assets. At December 31, 2000, the Company had a cumulative one-year negative gap position of $115.3 million, or 11.1% of total assets.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest payments on loans and debt securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and investments are predictable sources of funds, deposit flows and mortgage loan prepayments are greatly influenced by interest rate trends, economic conditions and competition.
During the past few years, the combination of generally low interest rates on deposit products and the attraction of alternative investments such as mutual funds and annuities has resulted in little growth or a net decline in deposits in certain periods. Based on its monitoring of historic deposit trends and its current pricing strategy for deposits, management believes the Company will retain a large portion of its existing deposit base.
From time to time, the Company utilizes advances from the FHLB primarily in connection with its management of the interest rate sensitivity of its assets and liabilities. Total advances outstanding at September 30, 2001 amounted to $176.2 million.
The Company's most liquid assets are cash and due from banks, short-term investments, debt securities and money market loan participations that generally mature within 90 days. At September 30, 2001, such assets amounted to $77.2 million, or 7.0% of total assets.
At September 30, 2001, Brookline exceeded all regulatory capital requirements. At that date, leverage capital was $230.2 million, or 21.92% of its adjusted assets. The minimum required leverage capital ratio is 3.00% to 5.00% depending on a bank's supervisory rating.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
For a discussion of the Company's management of market risk exposure, see "Asset/Liability Management" in Item 2 of Part I of this report and pages 12 through 14 of the Company's Annual Report incorporated by reference in Part II item 7A of Form 10-K for the fiscal year ending December 31, 2000.
For quantitative information about market risk, see pages 12 through 14 of the Company's 2000 Annual Report.
There have been no material changes in the quantitative disclosures about market risk as of September 30, 2001 from those presented in the Company's 2000 Annual Report.
Part II - Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are not involved in any litigation, nor is the Company aware of any pending litigation, other than legal proceedings incident to the business of the Company. Management believes the results of any current pending litigation would be immaterial to the consolidated financial condition or results of operations of the Company.
Item 2. Changes in Securities
Not applicable.
Item 3. Default Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
All required exhibits are included in Part I under Financial Statements (Unaudited) and Management's Discussion and Analysis of Operations, and are incorporated by reference herein.
There were no reports filed on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.
BROOKLINE BANCORP, INC.
Date: November 9, 2001
By:
/s/ Richard P. Chapman, Jr.
Richard P. Chapman, Jr.
President and Chief Executive Officer
/s/ Paul R. Bechet
Paul R. Bechet
Senior Vice President and Chief Financial Officer