Brookline Bancorp - 10-Q quarterly report FY

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, 2003

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)

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 – 58,819,204 shares outstanding as of November 3, 2003.

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

FORM 10-Q

Index

Part I -  Financial Information

Item 1.  Financial Statements

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands except share data)

See accompanying notes to the unaudited consolidated financial statements.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands except share data)

See accompanying notes to the unaudited consolidated financial statements.

2

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

See accompanying notes to the unaudited consolidated financial statements.

3

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

Nine months ended September 30, 2003 and 2002 (unaudited)

(Dollars in thousands)

(continued)

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See accompanying notes to the unaudited consolidated financial statements.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(continued)

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See accompanying notes to the unaudited consolidated financial statements.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Nine months ended September 30, 2003 and 2002

(unaudited)

(1)                     Basis of Presentation (Dollars in thousands)

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, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

Critical Accounting Policies

Allowance for Loan Losses

The Company’s accounting policy relating to the allowance for loan losses is based on management’s estimate of probable known and inherent credit losses existing in the loan portfolio. The allowance is established through provisions for loan losses charged to income. Loans are charged off against the allowance when the collectibility of principal is unlikely. Recoveries of loans previously charged off are credited to the allowance.

In determining the level of the allowance for loan losses, management evaluates specific credits and the loan portfolio in general using several criteria that include historical performance, collateral values, cash flows and current economic conditions. The evaluation culminates with a judgment on the probability of collection of loans outstanding. Management’s methodology provides for three allowance components. The first component represents allowances established for specific identified loans. The second component represents allowances for groups of homogenous loans that currently exhibit no identified weaknesses and are evaluated on a collective basis. Allowances for groups of similar loans are established based on factors such as historical loss experience, the level and trends of loan delinquencies, and the level and trends of classified assets. The last component is an unallocated allowance based on evaluation of factors such as trends in the economy and real estate values in the areas where the Company lends money, concentrations in the amount of loans the Company has outstanding to large borrowers and concentrations in the type and geographic location of loan collateral. Determination of the unallocated allowance is a very subjective process. Management believes the unallocated allowance is an important component of the total allowance because it (a) addresses the probable inherent risk of loss that exists in the Company’s loan portfolio (which is substantially comprised of loans with repayment terms extended over many years) and (b) helps to recognize the risk related to the margin of imprecision inherent in the estimation of the other two components of the allowance.

A loan loss provision is being established over the average life of indirect auto loans rather than at the time of origination. The allowance was $223 as of September 30, 2003. Loans delinquent over 30 days on September 30, 2003 amounted to $211, or 0.14% of the portfolio.

Premiums and Discounts on Debt Securities

Premiums and discounts on debt securities are amortized to expense and accreted to income over the life of the related debt security using the interest method. Premiums paid and discounts resulting from purchases of collateralized mortgage obligations (“CMOs”) and pass-through mortgage-backed securities (collectively referred to as “mortgage securities”) are amortized to expense and accreted to income over the estimated life of the mortgage securities using the interest method. At the time of purchase, the estimated life of mortgage securities is based on anticipated future prepayments of loans underlying the mortgage securities. The anticipated prepayments take into consideration several factors including the interest rates of the underlying loans, the contractual repayment terms of the underlying loans, the priority rights of the investor to the cash flow from the mortgage securities, the current and projected interest rate environment, and other economic conditions.

When differences arise between anticipated prepayments and actual prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. Unamortized premium or discount is adjusted to the amount that would have existed had the new effective yield been applied since purchase. The unamortized premium or discount is adjusted to the new balance with a corresponding charge or credit to interest income.

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Earnings Per Common Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the applicable period. Diluted earnings per share is calculated after adjusting the numerator and the denominator of the basic earnings per share calculation for the effect of all potential dilutive common shares outstanding during the period. The dilutive effects of options and unvested restricted stock awards are computed using the “treasury stock” method. Unearned ESOP shares are not included in outstanding shares.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, the Company adheres to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, in accounting for its stock option plans and discloses pro forma net income and earnings per share information as if the fair value based method had been adopted.

The following table summarizes information related to the calculation of net income per share of common stock for the three months and nine months ended September 30, 2003 and 2002. It also discloses, on a pro forma basis, how the Company’s net income and earnings per share for those periods would have been reduced had compensation expense for the Company’s stock-based compensation plan been determined based on the fair value at the grant date for awards made under the plan, consistent with SFAS No. 123.

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Cash Equivalents

For purposes of reporting cash flows, cash equivalents include highly liquid assets with an original maturity of three months or less. Highly liquid assets include cash and due from banks, short-term investments and money market loan participations.

(2)                     Corporate Structure and Stock Offering (Dollars in thousands except per share amounts)

On April 4, 2002, the Boards of Directors of Brookline Bancorp, MHC (the “MHC”), Brookline Bancorp, Inc. (the “Company”) and Brookline Savings Bank (“Brookline”) adopted a Plan of Conversion and Reorganization to convert the MHC from mutual to stock form and to complete a related stock offering in which shares of common stock representing the MHC’s ownership interest in the Company would be sold to investors.  In January 2003, Brookline Savings Bank changed its name to Brookline Bank.

The Plan of Conversion and Reorganization was approved by the stockholders of the Company and the depositors of Brookline on June 27, 2002 and by the Office of Thrift Supervision (the “OTS”) on July 8, 2002. The reorganization and stock offering were completed on July 9, 2002. As of that date, the 15,420,350 shares owned by the MHC were retired and the Company sold 33,723,750 shares of common stock for $10.00 per share. After taking into consideration related expenses of $4,549, net proceeds from the stock offering amounted to $332,688. An additional 24,888,478 shares were issued to existing stockholders based on an exchange rate of 2.186964 new shares of common stock for each existing share, resulting in 58,612,228 total new shares outstanding. Cash was paid in lieu of fractional shares.

Upon completion of the conversion and stock offering, (a) Brookline Bancorp Inc. changed from a federally-chartered holding company to a new Delaware holding company and (b) the MHC ceased to exist and its net assets of $8,457 were transferred into Brookline.

The conversion was accounted for as a reorganization in corporate form with no change in the historical basis of the Company’s assets, liabilities and equity. All references to the number of shares outstanding for purposes of calculating per share amounts prior to completion of the Conversion have been restated to give retroactive recognition to the exchange ratio applied in the conversion.

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(3)                     Investment Securities (Dollars in thousands)

Securities available for sale and held to maturity are summarized below:

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(4)                     Loans (Dollars in thousands)

A summary of loans follows:

(5)                     Deposits (Dollars in thousands)

A summary of deposits follows:

(6)                     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, 2003 and December 31, 2002, such taxes amounted to $1,916 and $2,449, respectively.

(7)                     Commitments and Swap Agreement (Dollars in thousands)

At September 30, 2003, the Company had outstanding commitments to originate loans of $38,094, $25,920 of which were commercial real estate and multi-family mortgage loans. Unused lines of credit available to customers were $21,794, of which $16,293 were equity lines of credit.

Brookline 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, Brookline 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. Brookline entered into this transaction to match more closely the repricing of its assets and liabilities and to

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reduce its exposure to increases in interest rates. The net interest expense paid for the three months and nine months ended September 30, 2003 and 2002 was $61, $51, $176 and $151, respectively. Changes in the fair value of the outstanding swap agreement are recognized as charges or credits to earnings. For the three months and nine months ended September 30, 2003 and 2002, $60, ($146), $97 and ($210), respectively, were (charged) credited to pre-tax earnings.

(8)                     Dividend Declaration

On October 16, 2003, the Board of Directors of the Company approved and declared a regular quarterly cash dividend of $0.085 per share of common stock to shareholders of record as of October 31, 2003 and payable on November 17, 2003.

(9)                     Stock Plans (Dollars in thousands, except per share amounts)

Activity under the Company’s 1999 Stock Option Plan for the nine months ended September 30, 2003 was as follows:

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 expire or are terminated unexercised will again be available for issuance under the 1999 Stock Option Plan. Options awarded vest over periods ranging from less than six months through five years. As of September 30, 2003, 242,042 options remain available for award under the 1999 Stock Option Plan.

On August 27, 2003, the stockholders of the Company approved the 2003 Stock Option Plan and the 2003 Recognition and Retention Plan (the “2003 Recognition Plan”). Pursuant to the 2003 Stock Option Plan, options to acquire up to 2,500,000 shares of the Company’s common stock may be granted to the employees and directors of the Company and Brookline. Pursuant to the 2003 Recognition Plan, up to 1,250,000 shares of the Company’s common stock may be awarded to the employees and directors of the Company and Brookline. Shares issued for awards under both of the 2003 plans may be from authorized but unissued shares, treasury shares or other shares acquired by the Company in open market purchases. No options to acquire shares have been granted under the 2003 Stock Option Plan.

On October 16, 2003, the Compensation Committee of the Board of Directors awarded to directors and certain officers and employees of the Company and Brookline 1,158,000 shares under the 2003 Recognition Plan. The shares awarded vest over periods ranging from January 2004 through October 2012. In the event employee recipients cease to maintain continuous service with the Company by reason of death, disability or a change in control, shares not yet vested at the time of such an event would vest. In addition to such events, shares awarded to non-employee directors would vest upon normal retirement from the Board of Directors. Expense for shares awarded is recognized over the vesting period based on the fair market value of the shares on the date of award. The total expense of the shares awarded on October 16, 2003 was $17,334 based on a per share fair market value of $14.97. Of that amount, approximately $3,870 will be charged to earnings in the fourth quarter of 2003, approximately $2,738 in 2004 and the remainder in varying amounts over the years 2005 through 2012.

Under the Company’s 1999 Recognition and Retention Plan, as of September 30, 2003, 1,041,282 shares awarded to directors and certain officers and employees had vested, 128,869 shares awarded had not yet vested and 26,086 shares remained available for future awards. The unvested shares will vest from April 2004 through April 2007. Expense for shares awarded under this plan for the nine months ended September 30, 2003 and 2002 was $106 and $121, respectively.

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(10)              Income Taxes (Dollars in thousands)

160 Associates, Inc. (“Associates”), a wholly-owned subsidiary of Brookline, owns 99.9% of Brookline Preferred Capital Corporation (“BPCC”), a real estate investment trust. In 2002, Associates received from the Department of Revenue of the Commonwealth of Massachusetts (“DOR”) Notices of Assessments for state excise taxes of $3,930 plus interest of $811. The assessments were based on a desk review of the financial institution excise returns filed by Associates for its 1999, 2000 and 2001 tax years. It was expected that the DOR would submit another Notice of Assessment for state excise taxes for the 2002 tax year and it was estimated that such assessment would amount to $3,748. The DOR contended that dividend distributions from a real estate investment trust (“REIT”) are not deductible in determining Massachusetts taxable income. Associates believed that the Massachusetts statute that provided for a dividend received deduction equal to 95% of certain dividend distributions applied to distributions made by BPCC to Associates. Accordingly, the Company made no provision in its consolidated financial statements through December 31, 2002 for the amounts assessed or additional amounts that might be assessed relating to the years 1999 through 2002.