SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ----------- Commission file number: 0-23695 BROOKLINE BANCORP, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-3402944 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation of organization) 160 WASHINGTON STREET, BROOKLINE, MA 02447-0469 (Address of principal executive offices) (Zip Code) (617) 730-3500 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12 (g) of the Act: COMMON STOCK, PAR VALUE OF $0.01 PER SHARE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ X ] The number of shares of common stock held by nonaffiliates of the registrant as of March 16, 2001 was 11,579,451 for an aggregate market value of $161,388,598. This excludes 15,420,350 shares held by Brookline Bancorp, MHC and 455,771 shares held by Brookline Savings Bank Employee Stock Ownership Plan and Trust. At March 16, 2001, the number of shares of common stock, par value $0.01 per share, issued and outstanding were 29,641,500 and 27,455,572, respectively. DOCUMENTS INCORPORATED BY REFERENCE 1. Sections of the Annual Report to Stockholders for the year ended December 31, 2000 (Part II and Part III) 2. Proxy Statement for 2000 Annual Meeting of Stockholders (Part I and Part III)
BROOKLINE BANCORP, INC. AND SUBSIDIARIES FORM 10-K INDEX <TABLE> <CAPTION> PART I PAGE <S> <C> <C> Item 1. Business 1 Item 2. Properties 22 Item 3. Legal Proceedings 22 Item 4. Submission Of Matters To A Vote Of Security Holders 22 PART II Item 5. Market For The Registrant's Common Stock And Related Security Holder Matters 22 Item 6. Selected Consolidated Financial Data 23 Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations 23 Item 7a. Quantitative And Qualitative Disclosures About Market Risk 23 Item 8. Financial Statements And Supplementary Data 23 Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosures 23 PART III Item 10. Directors and Executive Officers Of The Registrant 23 Item 11. Executive Compensation 23 Item 12. Security Ownership Of Certain Beneficial Owners And Management 23 Item 13. Certain Relationships And Related Transactions 24 PART IV Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K 24 Signatures 26 </TABLE>
PART I ITEM 1. BUSINESS GENERAL Brookline Bancorp, Inc. (the "Company") is a bank holding company incorporated in Massachusetts that was organized in November 1997 for the purpose of acquiring all of the capital stock of Brookline Savings Bank ("Brookline") upon completion of the reorganization of Brookline from a mutual savings bank into a mutual holding company structure. Brookline is a Massachusetts savings bank established in 1871. As part of the reorganization, the Company offered for sale 47% of the shares of its common stock in an offering fully subscribed for by eligible depositors of Brookline (the "Offering"). The remaining 53% of the Company's shares of common stock were issued to Brookline Bancorp, MHC (the "MHC"), a mutual holding company incorporated in Massachusetts. The reorganization and Offering were completed on March 24, 1998. Prior to that date, the Company had no assets and liabilities. Completion of the Offering resulted in the issuance of 29,095,000 shares of common stock, 15,420,350 shares (53%) of which were issued to the MHC and 13,674,650 shares (47%) of which were sold to eligible depositors of Brookline at $10.00 per share. The net proceeds of the Offering were $134.8 million. The Company contributed 50% of the net proceeds to Brookline for general corporate use and retained the other 50%. The Company has used the net proceeds it retained to fund a loan to the Brookline's employee stock ownership plan, acquire investment securities, invest in a new internet bank subsidiary and repurchase shares of the Company's common stock in the open market. ESTABLISHMENT OF A NEW INTERNET BANK SUBSIDIARY On August 12, 1999, the Company filed an application with bank regulators to form a new wholly-owned Massachusetts-chartered stock savings bank subsidiary to be called Lighthouse Bank ("Lighthouse"). On April 12, 2000, the Company received regulatory approval for 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 $25.0 million capital investment in Lighthouse at the beginning of May 2000. Lighthouse commenced doing business with the public in the last week of June 2000. MARKET AREA AND CREDIT RISK CONCENTRATION Brookline operates five full-service banking offices in the Town of Brookline, an urban/suburban community adjacent to the City of Boston, and a full service banking office in the city of Newton, a community adjacent to the Town of Brookline. The Newton office was opened on October 26, 2000. Brookline's deposits are gathered from the general public primarily in the Town of Brookline and surrounding communities. Brookline's lending activities are concentrated primarily in the greater Boston metropolitan area and eastern Massachusetts. The greater Boston metropolitan area benefits from the presence of numerous institutions of higher learning, medical care and research centers and the corporate headquarters of several significant mutual fund investment companies. Eastern Massachusetts also has many high technology companies employing personnel with specialized skills. These factors affect the demand for residential homes, multi-family apartments, office buildings, shopping centers, industrial warehouses and other commercial properties. Brookline's urban and suburban market area is characterized by a large number of apartment buildings, condominiums and office buildings. As a result, for many years, Brookline has emphasized multi-family and commercial real estate mortgage lending. These types of loans typically generate higher yields, but also involve greater credit risk than one-to four-family mortgage loans. Many of Brookline's borrowers have more than one 1
muti-family or commercial real estate loan outstanding with Brookline. Moreover, the loans are concentrated in the market area described in the preceding paragraph. Lighthouse conducts its business via the internet. It gathers deposits from and offers consumer-related loans to the general public. As of December 31, 2000, its $33.3 million loan portfolio was comprised primarily of residential mortgage loans ($29.7 million) located in the same market area served by Brookline. ECONOMIC CONDITIONS AND GOVERNMENTAL POLICIES The earnings and business of the Company are affected by external influences such as general economic conditions and the policies of governmental authorities, including the Federal Reserve Board. The Federal Reserve Board regulates the supply of money and bank credit to influence general economic conditions throughout the United States. The instruments of monetary policy employed by the Federal Reserve Board affect interest rates earned on investment securities and loans and interest rates paid on deposits and borrowed funds. Repayment of loans made by Brookline and Lighthouse (collectively, the "Banks"), in particular multi- family and commercial real estate loans, generally is dependent on sufficient income from the properties to cover operating expenses and debt service. Accordingly, the asset quality of the Banks' loan portfolios is greatly affected by the economy in the Banks' market area. During the past few years, the Massachusetts economy has been strong and interest rates have declined or remained at attractive levels. While these conditions, for the most part, have had a favorable impact on property values and the business of the Banks and their borrowers, declining interest rates have prompted many borrowers to refinance existing loans and seek new loans at lower interest rates fixed for longer periods of time. Besides causing pressure on the Banks' interest rate margin, the low interest rate environment has resulted in lower levels of deposit growth as customers have found other investment instruments more attractive. During the late 1980s and early 1990s, a regional recession and a higher interest rate environment caused a significant decline in employment and in real estate values, ultimately resulting in the failure of many financial institutions in Massachusetts and New England. COMPETITION The Banks face significant competition both in making loans and in attracting deposits. The Boston metropolitan area has a high density of financial institutions, many of which are branches of significantly larger institutions which have greater financial resources than the Banks, and all of which are competitors of the Banks to varying degrees. The Banks' competition for loans comes principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies, credit unions, insurance companies and other financial service companies. Its most direct competition for deposits has historically come from commercial banks, savings banks, savings and loan associations and credit unions. The Banks face additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies. SUPERVISION AND REGULATION GENERAL The Company and the Banks are subject to extensive regulation under federal and state banking laws and regulations. Both must obtain regulatory approvals prior to entering into certain transactions including, but not limited to, mergers with and acquisitions of other financial institutions. The following discussion of certain of the material elements of the regulatory framework applicable to banks and bank holding companies is not intended to be complete and is qualified in its entirety by the text of the relevant federal and state statutes and regulations. Changes in applicable laws and regulations could have a material effect on the business of the Company and the Banks. 2
As a bank holding company, the Company is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System (the "FRB") under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company is required to file reports with the FRB concerning its activities and financial condition. As a Massachusetts corporation, the Company is also subject to regulation by the Massachusetts Division of Banks (the "Division"). The Banks are subject to extensive regulation and examination by the Division, as their chartering agency, and the Federal Deposit Insurance Corporation (the "FDIC"), as their insurer of deposits to the extent permitted by law. The Banks are required to file reports with, and are examined periodically by, the Division and the FDIC concerning their activities and financial condition. The Banks are also members of the Federal Home Loan Bank of Boston (the "FHLB"). BANK HOLDING COMPANY REGULATION GENERAL. The FRB has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices against the Company, its subsidiaries, and officers, directors and other institution-affiliated parties. The Company must obtain the approval of the FRB and the Massachusetts Board of Bank Incorporation before (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares), (ii) acquiring all or substantially all of the assets of another bank or bank holding company or (iii) merging or consolidating with another bank holding company. Bank holding companies are generally prohibited from engaging in non-banking activities, subject to certain exceptions. As a bank holding company, the Company's activities are limited generally to the business of banking and activities determined by the FRB to be so closely related to banking as to be a proper incident thereto. The Company cannot engage, directly, indirectly or in any manner, in any real estate investment or development activities without the prior approval of the FRB. On November 12, 1999, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 was signed into law. This federal legislation is intended to modernize the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. As a result of the legislation, bank holding companies are permitted to engage in a wider variety of financial activities than permitted under prior law, particularly with respect to insurance and securities activities. In addition, in a change from prior law, bank holding companies are in a position to be owned, controlled or acquired by any company engaged in financially-related activities. However, to the extent that it permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This additional consolidation could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Company might be able to offer. This could adversely impact the Company's ability to retain and attract customers that prefer to obtain all of their financial services from one provider and, ultimately, the Company's profitability. Finally, under Massachusetts banking law, except with the prior written approval of the Massachusetts Board of Bank Incorporation: (1) no company shall become a bank holding company ; (2) no bank holding company controlling 25% or more of each of two or more banking institutions may (i) acquire ownership or control of any additional voting stock in such banking institutions, or (ii) acquire ownership or control of any voting stock in any other banking institution in excess of 5% of the voting stock; (3) no bank holding company may acquire substantially all of the assets of a banking institution; and (4) no bank holding company may merge or consolidate with any other bank holding company. 3
INTERSTATE BANKING AND BRANCHING. Federal law permits adequately capitalized and managed bank holding companies to acquire control of banks in any state subject to certain deposit and other limitations. Further, banks in Massachusetts are allowed by federal and state law to establish and maintain branches through a merger or consolidation with or by the purchase of the whole or any part of the assets or stock of any out-of-state bank or through de novo branch establishment in any state other than Massachusetts. Since the Massachusetts law is reciprocal, financial institutions in states with reciprocity arrangements could enter Massachusetts through acquisition of or merger with a Massachusetts financial institution or through establishment of branches. TRANSACTIONS WITH AFFILIATES. The Banks and their subsidiaries are subject to a number of regulatory restrictions, including certain restrictions regarding (i) extensions of credit to the Company and the Company's nonbanking affiliates (collectively with the Company, the "Affiliates"); (ii) the purchases of assets from Affiliates; (iii) the issuance of a guarantee or acceptance of a letter of credit on behalf of Affiliates; and (iv) investments in stock or other securities issued by Affiliates or acceptance thereof as collateral for an extension of credit. Further, all transactions among the Company and its direct and indirect subsidiaries must be made on an arm's length basis and fair market terms. MASSACHUSETTS BANK REGULATION GENERAL. As Massachusetts-chartered savings banks, the Banks are subject to supervision, regulation and examination by the Division and to various Massachusetts statutes and regulations which govern, among other things, investment powers, lending and deposit-taking activities, borrowings, maintenance of surplus and reserve accounts, distribution of earnings and payment of dividends. In addition, the Banks are subject to Massachusetts consumer protection and civil rights laws and regulations. The Division's approval is required for a Massachusetts bank to establish or close branches, merge with other banks, organize a holding company, issue stock and undertake certain other activities. Any Massachusetts bank that does not operate in accordance with the regulations, policies and directives of the Massachusetts Commissioner of Banks (the "Commissioner") may be subject to sanctions for non-compliance including, among other things, suspension or revocation of its charter. The Commissioner may, under certain circumstances, suspend or remove officers or directors who have violated the law, conducted business in a manner unsafe, unsound or contrary to depositors' interests, or been negligent in the performance of their duties. BANK POWERS AND INVESTMENT ACTIVITIES. Generally, Massachusetts banks have powers equivalent to those of national banks. In addition, the Banks may invest in preferred and common stock of any corporation provided such investments do not involve control of any corporation and do not, in the aggregate, exceed 4% of the Banks' deposits. Subject to certain limits, the Banks may also invest in investments not otherwise legally permitted. DEPOSITORS INSURANCE FUND. All Massachusetts-chartered savings banks are required to be members of the Depositors Insurance Fund (the "DIF"), a corporation that insures savings bank deposits not covered by federal deposit insurance. The DIF is authorized to charge each savings bank member assessments based upon the level of the member's deposits insured by the DIF. FEDERAL DEPOSIT INSURANCE CORPORATION The FDIC insures the Banks' deposit accounts to the $100,000 maximum per separately insured account. The Banks are subject to regulation, examination and supervision by and the reporting requirements of the FDIC. The FDIC also has the authority to initiate enforcement actions against banks, after giving the Commissioner an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practice, or is in an unsafe or unsound condition. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") made extensive changes to the federal banking law. Among other things, FDICIA requires federal bank regulatory agencies to take 4
prompt corrective action to address the problems of under-capitalized banks. FDICIA also amended statutes governing extensions of credit to directors, executive officers and principal stockholders of banks and their holding companies. PROMPT CORRECTIVE ACTION The federal banking agencies have promulgated regulations to implement the system of prompt corrective action required by federal law. Under the regulations, a bank shall be deemed to be (i) "well capitalized" if it has total risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not subject to any written capital order or directive; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized"; (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under certain circumstances); (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Federal law and regulations also specify circumstances under which a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). "Undercapitalized" banks are subject to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank's compliance with such plan is required to be guaranteed by any company that controls the undercapitalized institution. If an "undercapitalized" bank fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" banks are subject to one or more of a number of additional restrictions, including an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cease receipt of deposits from correspondent banks, dismiss directors or officers, and restrict interest rates paid on deposits, compensation of executive officers and capital distributions by a parent holding company. Based on the foregoing, the Banks are currently classified as "well capitalized". STANDARDS FOR SAFETY AND SOUNDNESS The federal agencies have adopted Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines"). The Guidelines set forth standards for use by federal banking agencies to identify and address problems at insured depository institutions before capital becomes impaired. The standards address internal controls and information systems, the internal audit program, credit underwriting, loan documentation, interest rate risk exposure, asset growth, and compensation, fees and benefits. The standards also require institutions to examine asset quality and earnings standards. If a federal banking agency determines that an institution fails to meet any of the prescribed standards, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standards. LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL TRANSACTIONS The FRB has issued a policy statement expressing their view that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The FRB may prohibit a bank holding company from paying any dividends if its bank subsidiary is classified as "undercapitalized." The FRB has imposed certain restrictions regarding the waiving of dividend payments by the Company to its mutual holding company parent. To date, the mutual holding company has not waived any dividends paid by the 5
Company. If, in the future, the mutual holding company sought to waive dividends paid by the Company and obtained the approval of the FRB to do so, the cumulative amount of waived dividends would not be available for payment by the Company to minority stockholders and would be maintained in a restricted capital account. While such account would not have to be reflected in the Company's financial statements, it would not be available for distribution to minority stockholders if the mutual holding company parent decided to convert to stock form in the future. The FDIC has the authority to use its enforcement powers to prohibit a savings bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe and unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements. Massachusetts law also restricts a bank from declaring a dividend that would reduce its capital below (i) the amount required to be maintained by state and federal law and regulations or (ii) the amount of a bank's liquidation account established in connection with a bank's reorganization. Under the Division's regulations, the Company is prohibited from repurchasing any shares of its stock within three years of its date of issuance unless the repurchase is limited to (i) stock repurchases at amounts designated by the Commissioner where compelling and valid business reasons are established to the satisfaction of the Commissioner and (ii) stock repurchases in amounts up to the shares covered by qualified employee stock benefit plans. Bank holding companies are required to give the FRB prior written notice of any purchase or redemption of their outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of their consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB. This notification requirement does not apply to any company that meets the well-capitalized standard for commercial banks, has a safety and soundness examination rating of at least a "2" and is not subject to any unresolved supervisory issues. On October 20, 1998, the Company received the approval of the Commissioner to repurchase up to 5% of its outstanding common stock, or 1,454,750 shares. By the end of February 2000, the Company had completed such stock repurchases, had repurchased 546,986 shares in connection with the Employee Stock Ownership Plan approved by the Board of Directors at the time of the Offering and had repurchased 367,564 shares in connection with the 546,500 shares awarded under the Recognition and Retention Plan approved by Company stockholders on April 15, 1999. On March 10, 2000, the Company received the approval of the Commissioner to repurchase up to 5.0% of its outstanding shares, exclusive of shares owned by the MHC, or 610,995 shares. As of March 16, 2001, the Company had repurchased 343,614 shares under this authorization. COMMUNITY REINVESTMENT ACT Under the Community Reinvestment Act (the "CRA") and a Massachusetts statutory counterpart, the Banks have a continuing and affirmative obligation, consistent with their safe and sound operations, to help meet community credit needs, including low and moderate income neighborhoods. The Banks are subject to examination by the FDIC and the Division regarding their compliance with CRA requirements. Brookline's latest ratings from examinations conducted by the FDIC and the Division were "satisfactory". Lighthouse has not yet been examined. FEDERAL SECURITIES LAW The common stock of the Company is registered with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. The Company is also required to file annual, quarterly and periodic reports with the SEC. 6
FEDERAL HOME LOAN BANK SYSTEM The Federal Home Loan Bank system functions as a reserve credit source for its member financial institutions and is subject to the regulation and oversight of the Federal Housing Finance Board. The Bank is a voluntary member of the Federal Home Loan Bank of Boston ("FHLB"). As members, the Banks are required to own FHLB capital stock that is directly proportionate to their home mortgage loans and borrowings from the FHLB. All borrowings from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. 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. The charter conversion is subject to approval by federal regulators and the stockholders of the Company. The Board of Trustees of the MHC made a similar decision to convert the MHC's current Massachusetts charter to a federal mutual holding company charter. In connection with the conversion of the Company and the MHC to federal charter, Brookline has determined to convert its charter to a federal charter. Lighthouse is expected to retain its Massachusetts state savings bank charter, but will make an election under Section 10(l) of the Home Owners' Loan Act to be treated as a "savings association" for purposes of the holding company regulations. Reasons for and the impact of the charter conversion on the Company's operations are included in the section headed "Proposal 2 - Plan of Charter Conversion" of the Company's Proxy Statement dated March 9, 2001 which is incorporated herein by reference. INVESTMENT SECURITIES The investment policy of the Company is reviewed and approved by the Board of Directors on an annual basis. The Company's investment portfolio is structured so as to provide asset diversification, interest and dividend income, a source of liquidity to meet loan demand and potential deposit outflows, and the opportunity to achieve capital appreciation through long-term investment in equity securities. The Company's current policy generally favors investment in U.S. Government and Agency securities, corporate debt obligations, mortgage-backed and mortgage-related securities and corporate equities. The policy allows the use of interest rate swaps, options and futures, but only for purposes of hedging the interest or credit risk of specific Company assets. While the Company has seldom used hedging instruments, at December 31, 2000, it was a party to a $5.0 million interest-rate swap agreement that matures April 14, 2005. The Company entered into the agreement to match more closely the repricing of certain assets and liabilities and to reduce its exposure to increases in interest rates. For the past few years, the Company's investment strategy has focused on the purchase of U.S. Government and Agency obligations and corporate debt obligations generally maturing within two years. The Company's investment policy normally requires that corporate obligations be rated "A" or better at the time of acquisition. In certain instances, corporate obligations rated "BBB" can be purchased. At December 31, 2000, $4.6 million of the Company's debt securities were rated lower than "A". Included in this amount was a $2.0 million bond issued by Southern California Edison payable June 1, 2001, and bearing interest at 6.50% per annum. This debt security, which is classified as available for sale, was rated "A" at the time of purchase and "CC" at March 16, 2001. The market value of this security was $147,000 less than its face value at December 31, 2000 and $520,000 at March 16, 2001. Repayment of this security at maturity could depend on how the current electricity crisis in California is ultimately resolved. The Company has stopped accruing interest on this security as of January 1, 2001. Since the latter part of 1998, the Company has also purchased collateralized mortgage obligations with average maturities of about three years for yield enhancement. Such obligations had a carrying value of $70.0 million at December 31, 2000. 7
At December 31, 2000, the Company's marketable equity securities portfolio totaled $24.1 million, including net unrealized gains of $9.2 million. Most of the portfolio was comprised of the stocks of national, regional money center and community banks, Freddie Mac and utility companies. Included in the portfolio at December 31, 2000 was 5.2% of the common stock of Medford Bancorp, Inc., a community bank in Massachusetts; the market value of that stock was $6.6 million at that date. The Company's policy limits the aggregate carrying value of marketable equity securities to no more than 25% of the Company's stockholders' equity, excluding net unrealized gains on securities available for sale. The Company purchases marketable equity securities as long-term investments that can provide the opportunity for capital appreciation and dividend income that is taxed on a more favorable basis than operating income. There can be no assurances that investment in marketable equity securities will achieve appreciation in value and, therefore, such investments involve higher risk. The following table sets forth the composition of the Company's debt and equity securities portfolios at the dates indicated: <TABLE> <CAPTION> AT DECEMBER 31, ----------------------------------------------------------------- 2000 1999 1998 --------------------- ------------------- ------------------- PERCENT PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL ------ -------- ------ -------- ------ -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Debt securities: U.S. Government and Agency obligations.. $ 11,989 5.79% 40,895 17.18% $ 92,824 35.69% Corporate obligations................... 93,673 45.26 112,999 47.48 124,609 47.91 Collateralized mortgage obligations and mortgage-backed securities....... 70,004 33.83 49,629 20.85 6,891 2.65 -------- ------ --------- ------ --------- ------ Total debt securities................. 175,666 84.88 203,523 85.51 224,324 86.25 Marketable equity securities............. 24,142 11.67 28,186 11.85 30,595 11.76 Restricted equity securities............. 7,145 3.45 6,279 2.64 5,174 1.99 -------- ----- --------- ------ --------- ------ Total investment securities........... $206,953 100.00% $ 237,988 100.00% $ 260,093 100.00% ======== ====== ========= ====== ========= ====== Debt and equity securities available for sale $149,361 72.17% $ 128,275 53.90% $ 133,529 51.34% Debt securities held to maturity......... 50,447 24.38 103,434 43.46 121,390 46.67 Restricted equity securities............. 7,145 3.45 6,279 2.64 5,174 1.99 -------- ----- --------- ------ --------- ------ Total investment securities........... $206,953 100.00% $ 237,988 100.00% $ 260,093 100.00% ======== ====== ========= ====== ========= ====== </TABLE> The investment portfolio increased in size in 1998 as a result of the placement of a significant amount of the net proceeds from the Offering in debt securities. Since then, the Company has reduced the percentage of its assets in debt securities in connection with funding growth in the loan portfolio.The following table sets forth certain information regarding the amortized cost and market values of the Company's investment securities at the dates indicated: <TABLE> <CAPTION> AT DECEMBER 31, ----------------------------------------------------------------- 2000 1999 1998 ------------------- ------------------- ------------------- AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE COST VALUE --------- -------- --------- ------- --------- ------ (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Securities available for sale: Debt securities: U.S. Government and Agency obligations $ 11,836 $ 11,989 $ 41,026 $ 40,895 $ 88,186 $ 88,810 Corporate obligations......................... 44,467 44,704 11,409 11,204 8,218 8,183 Collateralized mortgage obligations........... 68,225 68,526 48,729 47,990 5,982 5,941 -------- -------- -------- -------- -------- -------- Total debt securities...................... 124,528 125,219 101,164 100,089 102,386 102,934 Marketable equity securities.................... 14,948 24,142 14,878 28,186 7,939 30,595 -------- -------- -------- -------- -------- -------- Total securities available for sale 139,476 149,361 116,042 128,275 110,325 133,529 Net unrealized gains on securities available for sale............................ 9,885 - 12,233 - 23,204 - -------- -------- -------- -------- -------- -------- Total securities available for sale, net... $149,361 $149,361 $128,275 $128,275 $133,529 $133,529 ======== ======== ======== ======== ======== ======== Securities held to maturity: U.S. Government and Agency obligations.... $ - - $ - $ - $ 4,014 $ 4,038 Corporate obligations..................... 48,969 48,860 101,795 100,854 116,426 117,012 Mortgage-backed securities................ 1,478 1,477 1,639 1,597 950 993 -------- -------- -------- -------- -------- -------- Total securities held to maturity....... $ 50,447 $ 50,337 $103,434 $102,451 $121,390 $122,043 ======== ======== ======== ======== ======== ======== Restricted equity securities: Federal Home Loan Bank of Boston stock.... $ 6,771 $ 5,905 $ 4,921 Massachusetts Savings Bank Life Insurance Company stock........................... 253 253 253 Other stock............................... 121 121 - -------- -------- -------- Total restricted equity securities...... $ 7,145 $ 6,279 $ 5,174 ======== ======== ======== </TABLE> 8
The table below sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Company's securities portfolio at the date indicated. <TABLE> <CAPTION> AT DECEMBER 31, 2000 ----------------------------------------------------------------------------------------- AFTER ONE YEAR AFTER FIVE YEARS ------------------------------------------- -------------------------------------------- AFTER TEN YEARS ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS TOTAL ----------------- --------------------- ---------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD ------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Securities available for sale: Debt securities: U.S. Government and Agency obligations........................ $ 3,997 6.00% $ 7,082 7.01% $ - -% $ 910 7.86% $ 11,989 6.74% Corporate obligations................ 9,880 6.56 33,589 7.13 - - 1,235 9.43 44,704 7.07 Collateralized mortgage obligations.. 1,995 5.60 66,531 6.34 - - - - 68,526 6.32 -------- -------- ------ ------- -------- Total debt securities.............. 15,872 6.30 107,202 6.63 - - 2,145 8.76 125,219 6.63 -------- -------- ------ ------- Marketable equity securities (1)....... 24,142 4.65 -------- Total securities available for sale......................... 149,361 6.31 -------- Securities held to maturity: Corporate obligations.................. 40,666 5.85 8,203 6.60 100 7.50 - - 48,969 5.98 Mortgage-backed securities............. - - 49 6.85 552 8.67 877 6.40 1,478 7.26 -------- -------- ------ ------- -------- Total securities held to maturity.. 40,666 5.85 8,252 6.60 652 8.49 877 6.40 50,447 6.02 -------- -------- ------ ------- -------- Restricted equity securities: Federal Home Loan Bank of Boston stock................................ 6,771 8.00 Massachusetts Savings Bank Life Insurance Company stock (1).......... 253 4.18 Other stock............................ 121 - -------- Total restricted equity securities (1)................... 7,145 7.73 -------- -------- ------ ------- -------- Total securities................... $ 56,538 5.98% $115,454 6.63% $652 8.49% $ 3,022 8.08% $206,953 6.29% ======== ======== ====== ======= ======== - ------------------ </TABLE> (1) The yields have been calculated on a tax equivalent basis. 9
LOANS The Company's loan portfolio consists primarily of first mortgage loans secured by multi-family, commercial and one-to-four family residential real estate properties located in the Company's primary lending area. Another component of the loan portfolio consists of participations in commercial loans to national companies and organizations originated and serviced primarily by money center banks. Generally, the participations mature between one day and three months and are viewed by the Company as an alternative short-term investment for liquidity management purposes rather than as traditional commercial loans. The Company also provides financing for construction and development projects, commercial lines of credit primarily to condominium associations, home equity and second mortgage loans and other consumer loans. The Company relies on community contacts as well as referrals from existing customers, attorneys and other real estate professionals to generate business within its lending area. In addition, existing borrowers are an important source of business since many of its multi-family and commercial real estate customers have more than one loan outstanding with the Company. A commissioned loan originator on the staff of the Company is also used to generate residential mortgage loan business. The Company's ability to originate loans depends on the strength of the economy, trends in interest rates, customer demands and competition. Multi-family and commercial real estate mortgage lending are the Company's most significant areas of lending activities. At December 31, 2000 and 1999, such loans represented 73.2% and 77.1%, respectively, of gross loans, exclusive of money market loan participations. The Company intends to continue to emphasize these types of loans depending on the demand for such loans and trends in the real estate market and the economy. The Company has written underwriting policies to control the inherent risks in origination of loans. The policies address approval limits, loan-to-value ratios, appraisal requirements, debt service coverage ratios, loan concentration limits and other matters relevant to loan underwriting. A number of factors are considered in originating multi-family and commercial real estate mortgage loans. The qualifications and financial condition of the borrower (including credit history), profitability and expertise, as well as the value and condition of the underlying property, are evaluated. When evaluating the qualifications of the borrower, the Company considers the financial resources of the borrower, the borrower's experience in owning or managing similar property and the borrower's payment history with the Company and other financial institutions. Factors considered in evaluating the underlying property include the net operating income of the mortgaged premises before debt service and depreciation, the debt service coverage ratio (the ratio of net operating income to debt service) and the ratio of the loan amount to the appraised value. Frequently, multi-family and commercial real estate mortgage loans are made for five to ten year terms, with an amortization period of twenty to twenty-five years, and are priced on an adjustable-rate basis with the borrower's option to fix the interest rate for the first few years. At the borrower's option, at the time of origination or later during the term, the loan may be converted to a fixed rate, provided the fixed-rate period selected by the borrower does not exceed the original term of the loan. When fixed-rate loans are prepaid, in addition to collecting a normal fee, a "yield maintenance" fee is also collected when loans are paid prior to the maturity of their fixed-rate period. During 1997 and 1998, and in particular the second half of 1998, a stable and then declining interest rate environment prompted many multi-family and commercial real estate borrowers to exercise their options to convert their adjustable-rate loans to a fixed-rate basis for several years. Additionally, many new loans originated since 1998 have been priced at inception on a fixed-rate basis generally for periods ranging from two to seven years. If interest rates increase during the fixed-rate phase of these loans, net interest income relating to these loans would be negatively affected. Occasionally, the Company has partially funded loans originated on or converted to a fixed-rate basis by borrowing funds from the FHLB on a fixed-rate basis for periods that approximate the fixed-rate terms of the loans. The Company offers both fixed-rate and adjustable-rate mortgage loans secured by one-to-four family residences. Generally, fixed-rate residential mortgage loans are not maintained in the Company's loan portfolio. 10
At December 31, 2000, construction and development loans amounted to $19.9 million, $6.6 million of which had not been advanced as of that date; Lighthouse has not originated any construction loans. The $19.9 million is comprised of $7.9 million pertaining to construction of multi-family properties, $5.5 million pertaining to construction of commercial properties, $3.7 million pertaining to construction of one-to-four family residential homes and $2.8 million pertaining to construction of condominiums. Different criteria are applied in underwriting construction loans for which the primary source of repayment is the sale of the property than 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, Brookline 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, Brookline 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. Construction and development financing is generally considered to involve a higher degree of risk than long-term financing on improved, occupied real estate. 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, Brookline may be confronted with a project which, upon completion, has a value that is insufficient to assure full loan repayment. Commercial loans amounted to $33.2 million at December 31, 2000 compared to $30.5 million at December 31, 1999. At both dates, the portfolio included a $10.0 million money market loan participation with a one year maturity and loans to condominium associations for the purpose of funding capital improvements. Loans to condominium associations amounted to $15.8 million at December 31, 2000 compared to $12.3 million at December 31, 1999. Typically, such loans are made for five to ten year terms and are secured by a general assignment of the revenue of the condominium association. 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. 11
The following table sets forth the comparison of the Company's loan portfolio in dollar amounts and in percentages by type of loan at the dates indicated. <TABLE> <CAPTION> AT DECEMBER 31, ------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------ ------------------ ------------------ ------------------ ------------------- PERCENT PERCENT PERCENT PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL -------- -------- -------- -------- -------- -------- -------- -------- -------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Mortgage loans: One-to-four family.............. $114,411 15.04% $ 74,889 11.13% $ 64,467 11.19% $ 68,907 14.25% $ 57,725 13.08% Multi-family.................... 300,841 39.55 297,270 44.18 262,678 45.58 219,909 45.50 200,368 45.40 Commercial real estate.......... 255,895 33.65 221,330 32.89 197,593 34.29 149,540 30.94 139,430 31.60 Construction and development.... 19,947 2.62 24,719 3.67 17,255 2.99 13,382 2.77 7,261 1.65 Home equity..................... 6,596 0.87 5,800 0.86 5,505 0.96 5,276 1.09 6,398 1.45 Second.......................... 27,236 3.58 16,328 2.43 13,944 2.42 15,855 3.28 19,872 4.50 -------- ------ -------- ------ -------- ------ -------- ------- -------- ------ Total mortgage loans.......... 724,926 95.31 640,336 95.16 561,442 97.43 472,869 97.83 431,054 97.68 Commercial loans.................. 33,205 4.36 30,514 4.54 13,051 2.26 9,074 1.88 9,221 2.09 Consumer loans.................... 2,488 0.33 2,012 0.30 1,775 0.31 1,393 0.29 1,023 0.23 -------- ------ -------- ------ -------- ------ -------- ------- -------- ------ Total gross loans, excluding money market loan participations.............. 760,619 100.00% 672,862 100.00% 576,268 100.00% 483,336 100.00% 441,298 100.00% ====== ====== ====== ====== ======= Less: Unadvanced funds on loans....... (43,030) (35,746) (26,096) (9,352) (11,950) Deferred loan origination fees.. (1,030) (1,550) (1,604) (1,562) (1,326) Unearned discounts.............. - (10) (10) (10) (289) -------- -------- -------- -------- -------- Total loans, excluding money market loan participations.. 716,559 635,556 548,558 472,412 427,733 Money market loan participations.. 28,250 15,400 44,300 24,000 52,950 -------- -------- -------- -------- -------- Total loans, net $744,809 $650,956 $592,858 $496,412 $480,683 ======== ======== ======== ======== ========= </TABLE> 12
Many of the Company's borrowers have done business with the Company for years and have more than one loan outstanding. It is the Company's current policy that the aggregate amount of loans outstanding to any one borrower or related entities may not exceed 8.0% of the Brookline's core capital (stockholders' equity exclusive of unrealized gains or losses on securities available for sale, net of income taxes, which, at December 31, 2000, amounted to $204.3 million). At December 31, 2000, the largest borrower had aggregate loans outstanding of $15.4 million, or 7.5% of core capital. Including this borrower, there were 27 borrowers each with aggregate loans outstanding at December 31, 2000 in excess of $5.0 million, the cumulative total of which was $200.6 million, or 28.0% of loans outstanding, exclusive of money market loan participations. Most of this cumulative amount is comprised of multi-family and commercial real estate mortgage loans. The following table shows the contractual maturity and repricing dates of the Company's loan portfolio at December 31, 2000 The table does not include prepayments or scheduled principal amortization. <TABLE> <CAPTION> AT DECEMBER 31, 2000 ----------------------------------------------------------------------------------- REAL ESTATE MORTGAGE LOANS OTHER ------------------------------------------- HOME COMMERCIAL ONE-TO- COMMERCIAL CONSTRUCTION EQUITY AND AND MONEY MARKET FOUR MULTI- REAL AND SECOND CONSUMER LOAN FAMILY FAMILY ESTATE DEVELOPMENT MORTGAGE LOANS PARTICIPATIONS -------- ------ ---------- ------------ ---------- ---------- -------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> Amounts due (1): Within one year..................... $ 28,095 $ 68,924 $ 45,917 $11,066 $15,177 $21,450 $28,250 -------- -------- -------- ------- ------- ------- ------- After one year: More than one year to three years... 23,911 99,142 80,450 - 909 4,597 - More than three years to five years. 52,468 74,982 74,149 2,285 1,401 1,996 - More than five years to ten years.. 9,808 49,445 44,975 - 879 210 - More than ten years................. 92 462 4,799 - - - - -------- -------- -------- -------- -------- ------- ------- Total due after one year.......... 86,279 224,031 204,373 2,285 3,189 6,803 - -------- -------- -------- -------- -------- ------- ------- Total amount due.................. $114,374 $292,955 $250,290 $ 13,351 $ 18,366 $28,253 $28,250 ======== ======== ======== ======== ======== ======= ======= Less: Deferred loan origination fees. Net loans.................... <CAPTION> AT DECEMBER 31, 2000 -------------------- TOTAL LOANS ----- (IN THOUSANDS) <S> <C> Amounts due (1): Within one year..................... $218,879 -------- After one year: More than one year to three years... 209,009 More than three years to five years. 207,281 More than five years to ten years.. 105,317 More than ten years................. 5,353 ------- Total due after one year.......... 526,960 ------- Total amount due.................. 745,839 Less: Deferred loan origination fees. (1,030) -------- Net loans.................... $744,809 ======== </TABLE> - --------------- (1) Amounts due are net of unadvanced funds on loans. The following table sets forth at December 31, 2000 the dollar amount of gross loans contractually due or scheduled to reprice after one year and whether such loans have fixed interest rates or adjustable interest rates. <TABLE> <CAPTION> DUE AFTER ONE YEAR ----------------------------------- FIXED ADJUSTABLE TOTAL --------- ---------- --------- (IN THOUSANDS) <S> <C> <C> <C> Mortgage loans: One-to-four family................................................... $ 996 $ 85,283 $ 86,279 Multi-family......................................................... 72,518 151,513 224,031 Commercial real estate............................................... 75,656 128,717 204,373 Construction and development......................................... 110 2,175 2,285 Home equity and second mortgage...................................... 1,739 1,450 3,189 --------- --------- --------- Total mortgage loans.............................................. 151,019 369,138 520,157 Commercial and consumer loans.......................................... 1,792 5,011 6,803 --------- --------- --------- Total loans....................................................... $ 152,811 $ 374,149 $ 526,960 ========= ========= ========= </TABLE> 13
NON-PERFORMING ASSETS AND RESTRUCTURED LOANS The following table sets forth information regarding non-performing assets and restructured loans at the dates indicated. <TABLE> <CAPTION> AT DECEMBER 31, ---------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------ (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> Non-accrual loans (1): Mortgage loans: One-to-four family..................................... $ - $ - $ - $ 230 $ 428 Multi-family........................................... - - - - 253 Commercial real estate................................. - - 297 522 646 Construction and development........................... - - - - 6 Home equity............................................ - - 35 51 - Commercial loans......................................... - - - - - Consumer loans........................................... - - - - 4 ------- ------- ------- ------- ------ Total non-accrual loans.......................... - - 332 803 1,337 Other real estate owned, net (2)............................ - 707 1,940 2,373 1,689 ------- ------- ------- ------- ------ Total non-performing assets...................... $ - $707 $2,272 $3,176 $3,026 ======= ======= ======= ======= ====== Restructured loans.......................................... $ - $ - $ - $2,287 $5,438 ======= ======= ======= ======= ====== Allowance for loan losses as a percent of total loans....... 1.92% 2.13% 2.21% 2.51% 2.56% Allowance for loan losses as a percent of total non-performing loans (3).................................. NM N.M 3,943.98 1,552.05 921.91 Non-performing loans as a percent of total loans............ - - 0.06 0.16 0.28 Non-performing assets as a percent of total assets.......... - 0.08 0.26 0.45 0.45 </TABLE> (1) Non-accrual loans include all loans 90 days or more past due and other loans which have been identified by the Company as presenting uncertainty with respect to the collectibility of interest or principal. (2) Other real estate owned balances are shown net of related loss allowances. (3) Non-performing loans are comprised of non-accrual loans. N.M.= not meaningful Loans are placed on non-accrual status either when reasonable doubt exists as to the full timely collection of interest and principal or automatically when a loan becomes past due 90 days. On December 19, 2000, the Company sold its last remaining foreclosed property. For the years ended December 31, 2000, 1999 and 1998, net other real estate owned income, including gains from sales and reductions of valuation allowances, amounted to $172,000, $711,000 and $251,000, respectively. Restructured loans represent performing loans for which concessions (such as reductions of interest rates to below market terms and/or extension of repayment terms) were granted due to a borrower's financial condition. Based on satisfactory payment performance, a significant pay-down of loan principal and payment of interest at market rates, loans previously classified as restructured were removed from that category in 1998. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through provisions for loan losses based on management's on- going evaluation of the risks inherent in the Company's loan portfolio. Factors considered in the evaluation process include growth of the loan portfolio, the risk characteristics of the types of loans in the portfolio, geographic and large borrower concentrations, current regional economic and real estate market conditions that could affect the ability of borrowers to pay, the value of underlying collateral, and trends in loan delinquencies and charge-offs. The significance of any factor at a particular point in time fluctuates depending on management's assessment of circumstances. The Company utilizes an internal rating system to monitor and evaluate the credit risk inherent in its loan portfolio. At the time of loan approval, all loans other than one-to-four family residential mortgage loans, home equity loans and consumer loans, are assigned a rating based on all the factors considered in originating the loan. The initial loan rating is recommended by the loan officer and approved by the individuals or committee responsible for 14
approving the loan. Loan officers are expected to recommend to the Loan Committee changes in loan ratings when facts come to their attention that warrant an upgrade or downgrade in a loan rating. Problem and potential problem assets are assigned the three highest ratings. Such ratings coincide with the "Substandard", "Doubtful" and "Loss" classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets include those characterized by the distinct possibility that the insured financial institution will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve and/or charge-off is not warranted. Assets which do not currently expose the insured financial institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated "Special Mention". The Company assigns its fourth highest rating to loans meeting this designation. On a quarterly basis, management reviews with the Watch Committee the status of each loan assigned one of the Company's four adverse internal ratings and the judgments made in determining specific and general valuation allowances for losses. General valuation allowances represent loss allowances established to recognize the inherent risk associated with lending activities which, unlike specific allowances, have not been allocated to particular problem loans. Loans, or portions of loans, classified Loss are either charged off against valuation allowances or a specific allowance is established in an amount equal to the amount classified Loss. At December 31, 2000 and 1999, there were no loans which warranted specific reserves. At December 31, 2000, loans designated as Special Mention and Substandard totaled $10.7 million and $107,000, respectively. No loans were designated as Doubtful or Loss. The Substandard category included two loans secured by condominiums. The Special Mention category included eleven loans to one borrower secured by multi-family and commercial real estate properties. All of the loans designated Special Mention and Substandard at December 31, 2000 were current in their payment status. The Company's classification of its loans and the amount of the valuation allowances it sets aside for estimated losses are subject to review by the FDIC and the Division. Based on their reviews, these agencies can order the establishment of additional general or specific loss allowances. The FDIC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on allowances for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of a financial institution's valuation methodology. Generally, the policy statement recommends that financial institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management establish acceptable valuation processes that meet the objectives set forth in the policy statement. While the Company believes that it has established an adequate allowance for loan losses, there can be no assurance that the regulators, in reviewing the Company's loan portfolio, will not request the Company to materially increase its allowances for loan losses. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loss allowances could become necessary. 15
The following table sets forth activity in the Company's allowance for loan losses for the years presented in the table. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Balance at beginning of year................ $ 13,874 $ 13,094 $ 12,463 $ 12,326 $12,326 Provision for loan losses................... 427 450 300 - - Charge-offs: Mortgage loans: One-to-four family...................... - - - - - Multi-family............................ - - - - - Commercial real estate.................. - - - - 151 Construction and development............ - - - - - Home equity............................. - - - - - Second mortgage......................... - - - - - Commercial loans.......................... - - - - - Consumer loans............................ 10 - 1 6 15 Money market loan participations.......... - - - - - -------- -------- -------- -------- ------- Total charge-offs..................... 10 - 1 6 166 -------- -------- -------- -------- ------- Recoveries: Mortgage loans: Multi-family............................ - - - 25 140 Commercial real estate.................. - 327 315 8 - Construction and development............ - - - 103 21 Commercial loans.......................... 13 - 12 - - Consumer loans............................ 11 3 5 7 5 -------- -------- -------- -------- ------- Total recoveries...................... 24 330 332 143 166 -------- -------- -------- -------- ------- Net recoveries.............................. 14 330 331 137 - -------- -------- -------- -------- ------- Balance at end of year...................... $ 14,315 $ 13,874 $ 13,094 $ 12,463 $12,326 ======== ======== ======== ======== ======= </TABLE> The Company has experienced recoveries at least equal to or in excess of charge-offs in each of the past five years. The Company believes this favorable experience is attributable to the robust economy of the past few years and is not sustainable over normal lending cycles. When the economy is strong, an inherent higher level of risk continues to exist because of the long-term nature of the loan portfolio. Multi-family and commercial real estate loans have comprised over 70% of the Company's total loans outstanding for many years. These loans tend to have an average life of several years. The higher level of risk in such loans becomes more evident when the economy weakens. During 2000, 1999 and 1998, the allowance for loan losses was increased by $441,000, $780,000 and $631,000, respectively, as a result of net loan recoveries of $14,000, $330,000 and $331,000, respectively, and provision for loan losses of $427,000, $450,000 and $300,000, respectively. The increases in the allowance were made primarily because of significant growth of the loan portfolio. Total loans outstanding increased by $81.0 million in 2000, $87.0 million in 1999 and $76.1 million in 1998, exclusive of money market loan participations. Approximately half of the growth in 2000 was in the higher risk categories of multi-family and commercial real estate lending and half was in one-to-four family residential mortgage lending. Substantially all of the growth in 1999 and 1998 pertained to the higher risk areas of multi-family and commercial real estate mortgage lending. 16
The following tables set forth the Company's percent of allowance by loan category and the percent of loans to total loans in each of the categories listed at the dates indicated. <TABLE> <CAPTION> AT DECEMBER 31, ------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------- ------------------------------- ------------------------------- PERCENT PERCENT PERCENT OF LOANS OF LOANS OF LOANS PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY TO TOTAL TO GROSS TO TOTAL TO GROSS TO TOTAL TO GROSS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS --------- --------- --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Mortgage loans: One- to four-family............ $ 343 2.40% 15.04% $ 262 1.89% 11.13% $ 226 1.73% 11.19% Multi-family................... 2,696 18.83 39.55 4,660 33.59 44.18 3,610 27.57 45.58 Commercial real estate......... 3,104 21.68 33.65 4,526 32.62 32.89 4,214 32.18 34.29 Construction and development... 466 3.26 2.62 824 5.94 3.67 526 4.02 2.99 Home equity.................... 66 0.46 0.87 58 0.42 0.86 55 0.42 0.96 Second......................... 225 1.57 3.58 195 1.41 2.43 70 0.53 2.42 Commercial loans.................. 389 2.72 4.36 329 2.37 4.54 379 2.89 2.26 Consumer loans.................... 25 0.17 0.33 20 0.14 0.30 18 0.14 0.31 Money market loan participations.. - - - - - - - - - Unallocated....................... 7,001 48.91 - 3,000 21.62 - 3,996 30.52 - ------- ------- ------ ------- ------ ----- ------- ----- ----- Total allowance for loan losses..................... $14,315 100.00% 100.00% $13,874 100.00% 100.00% $13,094 100.00% 100.00% ======= ======= ====== ======= ====== ====== ======= ====== ====== </TABLE> <TABLE> <CAPTION> AT DECEMBER 31, -------------------------------------------------------------------------------------- 1997 1996 ---------------------------------------- ---------------------------------------- PERCENT PERCENT OF LOANS OF LOANS PERCENT OF IN EACH PERCENT OF IN EACH ALLOWANCE CATEGORY ALLOWANCE CATEGORY TO TOTAL TO GROSS TO TOTAL TO GROSS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS ------ --------- --------- ------ --------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Mortgage loans: One- to four-family........... $ 241 1.93% 14.25% $ 202 1.64% 13.08% Multi-family.................. 2,993 24.02 45.50 2,725 22.11 45.40 Commercial real estate........ 3,376 27.09 30.94 3,256 26.42 31.60 Construction and development.. 384 3.08 2.77 463 3.76 1.65 Home equity................... 53 0.43 1.09 64 0.52 1.45 Second........................ 79 0.63 3.28 99 0.80 4.50 Commercial loans................. 95 0.76 1.88 110 0.89 2.09 Consumer loans................... 14 0.11 0.29 10 0.08 0.23 Money market loan participations. - - - - - - Unallocated...................... 5,228 41.95 - 5,397 43.78 - -------- ----- ----- -------- ----- ----- Total allowance for loan losses $ 12,463 100.00% 100.00% $ 12,326 100.00% 100.00% ======== ====== ====== ======== ====== ====== </TABLE> The long-term nature of the Company's loan portfolio as well as the impact of economic changes make it most difficult, if not impossible, to conclude with precision the amount of loss inherent in the Bank's loan portfolio at a point in time. Ultimately, the balance of the allowance for loan losses is determined by evaluating several factors quantitatively and qualitatively and must be based on a positive response to the following questions: - Is the allowance adequate in relation to the estimated losses in the loan portfolio? - Is the provision for loan losses charged to operations reasonable in relation to the level of loss exposure resulting from changes and trends in the loan portfolio? The amounts allocated to loan categories in the above table are determined by consideration of several factors. Specific amounts are allocated on a loan-by-loan basis for any impairment loss as determined by applying one of the three methods cited in generally accepted accounting principles. In addition, general reserves are established based on long-term trends in loan charge-offs by category, delinquencies and the total of loans according to the Company's internal ratings. For the past several years, a portion of the Company's allowance for loan losses has been categorized as unallocated rather than being allocated to specific loan categories. The unallocated part of the allowance has been maintained in recognition of the inherent risks resulting from the following concentrations in the Company's portfolio: the significance of loans in the higher risk categories of multi-family, commercial real estate and construction mortgage loans and other commercial loans, concentrations in the geographic locations of properties on which such loans have been made and the aggregate amount of loans outstanding to larger borrowers. The 17
combination of these three concentrations creates a higher than normal degree of risk in the Company's loan portfolio. The unallocated portion of the allowance tends to be a greater percent of the total allowance in periods when the economy is strong. A downturn in economic conditions in the Company's primary lending area could have adverse consequences on the collectibility of the loan portfolio in a relatively short period of time. In such circumstances, inherent risks tend to be transformed into specifically quantified risks on a loan-by-loan basis. The Company has no established range into which the unallocated portion of the allowance should fall. Instead, the reasonableness of the unallocated portion is considered based on management's collective assessment of all the factors cited in the beginning of this section. In 1996, several refinements were made in the process followed to arrive at the allowance for loan losses. Greater use was made of information derived from loan ratings. Typically, new loans are rated 1, 2 or 3, with 3 being the rating most frequently assigned. Loans rated 1 and 2 are considered to have less risk exposure than loans rated 3. In recognition of the higher inherent risk in any loans rated 3 that were not on the Watch List, a general reserve was established equal to 2.0% of the total of 3 rated loans. General reserves established by applying reserve factors to total loans by category continued to be included as part of the allowance for loan losses. The reserve factors used for such calculations were based in part on trends in the Company's charge-offs. Lower reserve factors were started to be used in 1996 when the decision was made to establish a separate general reserve for 3 rated loans. This was considered appropriate because of the large amount of general reserves created by applying a 2.0% factor to 3 rated loans. Reserves continued to be established on Watch List loans through a combination of general and specific reserves. Since most new loans are rated 3 at the time of origination and in light of the significant growth of the loan portfolio over the past few years, application of the process described in the preceding paragraph resulted in a substantial increase in the general reserves allocated to higher risk loan categories. Despite that, the total of the allowance for loan losses was not increased by corresponding amounts because of continued improving trends in the quality of the loan portfolio. Instead, the unallocated portion of the allowance for loan losses was reduced. Having used the methodology described above since 1996, it became evident that the resulting reserves allocated to performing 3 rated loans were too high. While the total of the allowance for loan losses was considered appropriate, the correlation between underlying risk exposure and the amount of reserves allocated to performing higher risk loans seemed somewhat flawed. Accordingly, in 2000, the refinements described in the following paragraphs were made to the allowance process. General reserves continue to be established for the inherent risk in the loan portfolio. The reserve factors applied to calculate general reserves for each of the various loan categories continue to take into consideration the Company's experience and are in line with ranges suggested by bank regulators. Over the long-term life cycle of the Company's loan portfolio, the rating of a loan can change resulting in it being placed on the Company's Watch List. During the last economic downturn (1990 through 1994), the total of Watch List loans ranged from approximately 7% to 10% of total loans in the higher risk categories. When the total of Watch List loans is high, reserves assigned to such loans tend to be specific and based on a loan-by-loan assessment. During the most recent five year period, the percent of total Watch List loans to total higher risk loans declined substantially due to the very strong economy. Based on the Company's experience during the last economic downturn, it is known that loans in the higher risk categories have inherent characteristics that result in their being placed on the Watch List when the economy weakens. Such risk characteristics, which exist throughout the long-term life of the Company's loans, are less obvious in good economic times. Management believes that the allowance for loan losses should include general reserves for the inherent risk in the loan portfolio when the economy is strong and Watch List loans are lower than normal. Accordingly, when Watch List loans are less than 10% of total loans in the higher risk categories, a general reserve is established equal to 3.0% of the difference between 10% of adjusted higher risk loans and the actual amount of Watch List loans. Adjusted higher risk loans equals the total of loans in the higher risk categories less the total of loans rated 1 and 2. Loans with such ratings are far less likely to be included on the Watch List. A rate higher than 3.0% is used when management believes trends suggest higher loss exposure. The amount of general reserves allocated at December 31, 2000 as a result of applying this methodology was $878,000. 18
A comparison of the unallocated portion of the allowance disclosed in prior years to the unallocated amounts that would have resulted if the new methodology had been applied follows: <TABLE> <CAPTION> UNDER NEW UNDER PRIOR METHODOLOGY METHODOLOGY ----------- ------------ <S> <C> <C> At December 31: 1999.......................... $ 7,091 $ 3,000 1998.......................... 7,200 3,996 1997.......................... 7,542 5,228 1996.......................... 7,573 5,397 </TABLE> Since the economy strengthened and the quality of the loan portfolio continually improved during the past few years, a decline in the unallocated portion of the allowance of the magnitude shown in the table above should not have taken place during that time. If the new methodology were applied retroactively, as shown in the table above, the unallocated portion of the allowance would not have changed significantly from year to year. In view of the long-term average life of the Company's loan portfolio, management believes it is prudent to maintain part of the Company's allowance for loan losses as unallocated reserves in recognition of the ever-present inherent risk that exists in the Company's loan portfolio when the economy is strong and the quickness with which adverse consequences on the collectibility of the loan portfolio can arise when there is a downturn in the economy. DEPOSITS Historically, deposits have been the Company's primary source of funds. The Company offers a variety of deposit accounts with a range of interest rates and terms. The Company's deposit accounts consist of non-interest- bearing checking accounts and interest-bearing NOW accounts, savings accounts and money market savings accounts (referred to in the aggregate as "transaction deposit accounts") and certificate of deposit accounts. The Company offers Individual Retirement Accounts ("IRAs") and other qualified plan accounts. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and the relative attractiveness of competing deposit and investment alternatives. Brookline's deposits are obtained predominantly from customers in the Town of Brookline and surrounding communities. Lighthouse's deposits are gathered via the internet with over 75% of its business derived from customers in New England. It has customers in 49 states plus the District of Columbia. The Company relies primarily on competitive pricing of its deposit products, customer service and long-standing relationships with customers to attract and retain deposits. Market interest rates and rates offered by competing financial institutions significantly affect the Company's ability to attract and retain deposits. The Company does not use brokers to obtain deposits. The following table presents the deposit activity of the Company for the periods indicated. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 -------- --------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> Net deposits (withdrawals)....................... $ 73,254 $ 2,055 $ (14,132) Interest credited on deposit accounts............ 23,231 20,711 21,198 -------- --------- --------- Total increase (decrease) in deposit accounts.... $ 96,485 $ 22,766 $ 7,066 ======== ========= ========= </TABLE> Of the increase in deposits in 2000, $52.4 million was gathered by Lighthouse from the time it commenced doing business with the public in the last week of June 2000. Of that amount, approximately 20% was in interest- bearing checking accounts, 25% in money market savings accounts and 55% in certificates of deposit. Brookline experienced an 8.5% rate of deposit growth in 2000 as a result of expanded marketing efforts, the opening of a new retail branch on October 26, 2000 and branch divestitures by other financial institutions. 19
The following table sets forth the distribution of the Company's average deposit accounts for the years indicated and the weighted average interest rates on each category of deposits presented. Averages for the years presented utilize average daily balances. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 2000 YEAR ENDED DECEMBER 31, 1999 ------------------------------- ----------------------------- PERCENT PERCENT OF TOTAL WEIGHTED OF TOTAL WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE --------- -------- --------- --------- --------- ------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> NOW accounts................................. $ 50,843 9.46% 1.36% $ 43,897 8.74% 1.23% Savings accounts............................. 12,180 2.27 2.20 13,010 2.59 2.22 Money market savings accounts................ 206,093 38.36 3.95 190,813 37.99 3.90 Non-interest-bearing demand checking accounts 14,309 2.66 - 12,387 2.46 - --------- ------ --------- ------ Total transaction deposit accounts....... 283,425 52.75 3.21 260,107 51.78 3.18 --------- ------ --------- ------ Certificate of deposit accounts: Six months or less......................... 67,991 12.66 5.69 58,841 11.72 4.56 Over six months through 12 months.......... 105,105 19.58 5.38 104,192 20.74 4.94 Over 12 months through 24 months........... 34,762 6.47 5.51 29,150 5.80 5.38 Over 24 months............................. 45,847 8.54 5.89 50,005 9.96 6.09 --------- ------ --------- ------ Total certificate of deposit accounts.... 253,705 47.25 5.57 242,188 48.22 5.14 --------- ------ --------- ------ Total average deposits................... $ 537,130 100.00% 4.33% $502,295 100.00% 4.12% ========= ====== ========= ====== </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1998 ------------------------------- PERCENT OF TOTAL WEIGHTED AVERAGE AVERAGE AVERAGE BALANCE DEPOSITS RATE --------- --------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> NOW accounts........................................... $ 39,766 8.33% 1.55% Savings accounts....................................... 14,510 3.04 2.45 Money market savings accounts.......................... 164,134 34.39 3.87 Non-interest-bearing demand checking accounts.......... 11,908 2.50 - --------- ------- Total transaction deposit accounts................. 230,318 48.26 3.18 --------- ------- Certificate of deposit accounts: Six months or less................................... 63,273 13.26 5.09 Over six months through 12 months.................... 103,478 21.68 5.40 Over 12 months through 24 months..................... 27,369 5.73 5.62 Over 24 months....................................... 52,850 11.07 6.25 --------- ------- Total certificate of deposit accounts.............. 246,970 51.74 5.51 --------- ------- Total average deposits............................. $ 477,288 100.00% 4.39% ========= ======= </TABLE> At December 31, 2000, the Company had outstanding $84.6 million in certificate of deposit accounts of $100,000 or more, maturing as follows: <TABLE> WEIGHTED AMOUNT AVERAGE RATE ---------- ------------- (DOLLARS IN THOUSANDS) <S> <C> <C> MATURITY PERIOD Three months or less.......................... $ 30,849 6.25% Over three months through six months.......... 21,065 6.16 Over six months through twelve months......... 16,079 5.96 Over twelve months............................ 16,593 6.31 -------- $ 84,586 6.18% ======== </TABLE> BORROWED FUNDS The Company utilizes advances from the FHLB primarily in connection with its management of the interest rate sensitivity of its assets and liabilities. The advances are secured by all of the Company's stock and deposits in the FHLB and a general lien on one-to-four family mortgage loans, certain multi-family loans and U.S. Government and Agency obligations in an aggregate amount equal or up to 133% of outstanding advances. The 20
maximum amount that the FHLB will advance to member institutions, including the Company, fluctuates from time to time in accordance with the policies of the FHLB. At December 31, 2000, the Company had $133.4 million in outstanding advances from the FHLB and had the capacity to increase that amount to $232.5 million. The Company expects to continue to utilize borrowings from the FHLB as part of its management of the interest sensitivity of its assets and liabilities. The following table sets forth certain information regarding borrowed funds for the dates indicated: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------- 2000 1999 1998 -------- --------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> Advances from the FHLB: Average balance outstanding........................... $120,023 $ 106,812 $ 78,295 Maximum amount outstanding at any month end during the year.................................... 135,400 112,800 98,415 Balance outstanding at end of year.................... 133,400 108,800 94,350 Weighted average interest rate during the year........ 6.11% 6.04% 6.34% Weighted average interest rate at end of year......... 6.15% 5.91% 6.02% </TABLE> RETURN ON EQUITY AND ASSETS Return on equity and assets for the years presented is as follows: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------- 2000 1999 1998 -------- --------- --------- <S> <C> <C> <C> Return on assets (net income divided by average total assets)....................................... 2.29% 2.31% 2.33% Return on equity (net income divided by average stockholders' equity)............................... 7.83% 7.47% 7.88% Dividend payout ratio (dividends declared per share divided by net income per share) ............. 30.00% 28.38% NM Equity to assets ratio (average stockholders' equity divided by average total assets).............. 29.24% 30.86% 29.50% </TABLE> NM - not meaningful. Not presented for the period from March 24, 1998 (the date of conversion to stock ownership) through December 31, 1998 as the dividend payout ratio calculation for that period is not meaningful. 21
SUBSIDIARY ACTIVITIES Brookline and Lighthouse are wholly-owned subsidiaries of the Company. Information as to when they were established and their activities is included elsewhere in Part I of this document. Brookline Securities Corp. ("BSC") is a wholly-owned subsidiary of the Company and BBS Investment Corporation ("BBS") is a wholly-owned subsidiary of Brookline. These companies were established as Massachusetts security corporations for the purpose of buying, selling and holding investment securities on their own behalf and not as a broker. The income earned on their investment securities is subject to a significantly lower rate of state tax than that assessed on income earned on investment securities owned by the Company and Brookline. At December 31, 2000, BSC and BBS had total assets of $47.5 million and $107.1 million, respectively, of which $46.8 million and $105.7 million, respectively, were in investment securities and short-term investments. 160 Associates, Inc. ("Associates") is a wholly-owned subsidiary of Brookline established as a Massachusetts corporation primarily for the purpose of acquiring and holding stock in a subsidiary engaged in business that qualifies as a real estate investment trust. The amount of capital Associates invested in such activity amounted to $265.9 million at December 31, 2000. Brookline Preferred Capital Corporation ("BPCC") is a 99.9% owned subsidiary of Associates established as a Massachusetts corporation to engage in real estate business activities (including the acquisition and holding of securities and mortgage loans) that enable it to be taxed as a real estate investment trust for federal and Massachusetts tax purposes. At December 31, 2000, BPCC had total assets of $266.4 million, $202.1 million of which were mortgage loans originated by and acquired from Brookline. PERSONNEL As of December 31, 2000, the Company had 94 full-time employees and 13 part-time employees. The employees are not represented by a collective bargaining unit and the Company considers its relationship with its employees to be good. ITEM 2. PROPERTIES The branch located in Brookline's main office is owned by the Company. The other five branches and operations center of Brookline, and space in Waltham, Massachusetts used by Lighthouse to conduct its business are leased from unrelated third parties. The operations center is used primarily to house operations and support services. At December 31, 2000, the net book value of premises and leasehold improvements was $798,000. Refer to Note 13 of the Notes to Consolidated Financial Statements on page 43 of the Annual Report for information regarding the Company's lease commitments at December 31, 2000. ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which are believed by management to be immaterial to the financial condition and results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The common stock of the Company is traded on the Nasdaq National Market System. The approximate number of holders of common stock as of December 31, 2000 as well as a table setting forth cash dividends paid on 22
common stock and the high and low closing prices of the common stock for each of the quarters in the year ended December 31, 2000 appears on Page 54 of the Company's 2000 Annual Report which is incorporated herein by reference. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Selected Consolidated Financial Data of the Company appears on page 1 and the back of the cover page of the Company's 2000 Annual Report which is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations appears on pages 6 through 18 of the Company's 2000 Annual Report which is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and Qualitative Disclosures About Market Risk appears on pages 12 through 14 of the Company's 2000 Annual Report which is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and supplementary data appear on the pages indicated of the Company's 2000 Annual Report which is incorporated herein by reference: PAGES Report of Independent Certified Public Accountants............... 19 Consolidated Balance Sheets as of December 31, 2000 and 1999..... 20 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998......... 21 Consolidated Statements of Comprehensive Income for the years ended December 31, 2000, 1999 and 1998......... 22 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998......... 23 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998......... 24-25 Notes to Consolidated Financial Statements....................... 26-52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT A listing of and information about the Company's Directors and Executive Officers appears on pages 3 through 5 of the Company's proxy statement dated March 9, 2001 which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Executive Compensation is presented on page 10 of the Company's proxy statement dated March 9, 2001 which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners and Management is presented on pages 2 and 3 of the Company's proxy statement dated March 9, 2001 which is incorporated herein by reference. 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Relationships and Related Transactions are presented on page 15 of the Company's proxy statement dated March 9, 2001 which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) DOCUMENTS (1) Financial Statements: All financial statements are included in Item 8 of Part II of this Report. (2) Financial Statement Schedules: All financial statement schedules have been omitted because they are not required, not applicable or are included in the consolidated financial statements or related notes. (3) Exhibits: The exhibits listed below are filed herewith or incorporated herein by reference to other filings. EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 3.1 Articles of Organization of the Company. (Exhibit 3.1 to Registration Statement (No. 333-69245) on Form S-1 filed on November 18, 1997)** 3.2 Bylaws of the Company (Exhibit 3.2 to Form S-1 filed on November 18, 1997)** 4 Form of Common Stock Certificate of the Company (Exhibit 4 to Form S-1 filed on November 18, 1997)** 10.1 Form of Employment Agreement (Exhibit 10.1 to Form S-1 filed on November 18, 1997)** 10.1a Employment Agreement Between Brookline Bancorp, Inc. and Thomas R. Venables (Exhibit 10.1a to Form 10-Q filed on November 14, 2000)** 10.1b Employment Agreement Between Brookline Bancorp, Inc. and Claire S. Bean (Exhibit 10.1b to Form 10-Q filed on November 14, 2000)** 10.2 Form of Severance Agreement (Exhibit 10.2 to Form S-1 filed on November 18, 1997)** 10.3 Supplemental Retirement Income Agreement with Richard P. Chapman, Jr. (Exhibit 10.3 to Form S-1 filed on November 18, 1997)** 10.4 Supplemental Retirement Income Agreement with Susan M. Ginns (Exhibit 10.4 to Form S-1 filed on November 18, 1997)** 10.5 Supplemental Retirement Income Agreement with Charles H. Peck (Exhibit 10.5 to Form S-1 filed on November 18, 1997)** 10.6 Amended Employee Stock Ownership Plan (Exhibit 10.6 to Form 10-K filed on March 23, 2000 and Exhibit 10.6 to Form 10-Q filed on November 14, 2000)** 24
10.6a Lighthouse Bank Stock Option Agreement with Thomas R. Venables (Exhibit 10.6a to Form 10-Q filed on November 14, 2000)** 10.6b Lighthouse Bank Stock Option Agreement with Claire S. Bean (Exhibit 10.6b to Form 10-Q filed on November 14, 2000)** 11 Statement Regarding Computation of Per Share Earnings - Incorporated herein by reference. (See note 15 of the Notes to Consolidated Financial Statements on page 44 of the Company's Annual Report to Stockholders). 13 2000 Annual Report to Stockholders 21 Subsidiaries of the Registrant - This information is presented in Part I, Item 1. Business - Subsidiary Activities of this Report. - ----------- ** Filed as part of a previous Commission filing and incorporated herein by reference. (b) Reports on Form 8-K - No reports on Form 8-K were filed by the Company during the year ended December 31, 2000 25
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized <TABLE> <S> <C> BROOKLINE BANCORP, INC. Date: March 21, 2001 By: /S/ RICHARD P. CHAPMAN, JR --------------------------------------- Richard P. Chapman, Jr. President and Chief Executive Officer </TABLE> Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. <TABLE> <S> <C> By: /S/ RICHARD P. CHAPMAN, JR. By: /S/ PAUL R. BECHET -------------------------------------------- --------------------------------------------- Richard P. Chapman, Jr., President, Chief Paul R. Bechet, Senior Vice President and Executive Officer and Director Chief Financial Officer (Principal Executive Officer) (Principal Financial and Accounting Officer) Date: March 21, 2001 Date: March 21, 2001 By: /S/ OLIVER F. AMES By: -------------------------------------------- -------------------------------------------- Oliver F. Ames, Director Hollis W. Plimpton, Director By: By: -------------------------------------------- -------------------------------------------- Dennis S. Aronowitz, Director Edward D. Rowley, Director By: By: /S/ JOSEPH J. SLOTNIK -------------------------------------------- -------------------------------------------- George C. Caner, Jr., Director Joseph J. Slotnik, Director By: /S/ DAVID C. CHAPIN By: /S/ WILLIAM V. TRIPP, III --------------------------------------------- -------------------------------------------- David C. Chapin, Director William V. Tripp, III, Director By: /S/ WILLIAM G. COUGHLIN By: -------------------------------------------- -------------------------------------------- William G. Coughlin, Director Rosamond B. Vaule, Director By: By: /S/ PETER O. WILDE -------------------------------------------- -------------------------------------------- John L. Hall, II, Director Peter O. Wilde, Director By: /S/ CHARLES H. PECK By: /S/ FRANKLIN WYMAN, JR. -------------------------------------------- -------------------------------------------- Charles H. Peck, Director Franklin Wyman, Jr., Director </TABLE> 26