-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gb51NTwyCyF0TTg87ogCmWYsn7+XT/B0ePmj2Mw/EJmBASrRevGIfkOFlEZuqr/N 0TKm/6SdkamcdheA7AwG/g== 0001029869-98-000442.txt : 19980401 0001029869-98-000442.hdr.sgml : 19980401 ACCESSION NUMBER: 0001029869-98-000442 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROOKLINE BANCORP INC CENTRAL INDEX KEY: 0001049782 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-23695 FILM NUMBER: 98583441 BUSINESS ADDRESS: STREET 1: 160 WASHINGTON STREET CITY: BROOKLINE STATE: MA ZIP: 02147 BUSINESS PHONE: 6177303500 MAIL ADDRESS: STREET 1: 160 WASHINGTON ST CITY: BROOKLINE STATE: MA ZIP: 02147 10-K405 1 BROOKLINE BANCORP, INC. FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transaction period from ___________________ to ____________________ Commission File Number: 0-23695 ------- BROOKLINE BANCORP, INC. --------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Massachusetts 04-3402944 - ------------------------------------------------------------ --------------------------------------- State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number) 160 Washington Street, Boookline, MA 02147 - ------------------------------------------------------------ --------------------------------------- (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 $.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 twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been subject to such requirements for the past 90 days. YES NO X ----- ------ 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 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] As of March 25, 1998, there were issued and outstanding 29,095,000 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE None. PART I ITEM 1. BUSINESS General Brookline Bancorp, Inc. Brookline Bancorp, Inc. (the "Company") is a Massachusetts corporation that was organized in November 1997 at the direction of the Board of Trustees of Brookline Savings Bank (the "Bank") for the purpose of acquiring all of the capital stock of the Bank upon completion of the Bank's reorganization into the mutual holding company structure. The reorganization and the initial public offering of common stock by the Company associated with the reorganization were consummated on March 24, 1998, and accordingly, had not been consummated by December 31, 1997, the end of the 12-month period for which this Annual Report on Form 10-K is filed. Prior to the consummation of the reorganization, the Company had no assets or liabilities. Following consummation of the reorganization, the Company's only significant assets are 100% of the shares of the Bank's outstanding common stock, the Company's loan to the Bank's employee stock ownership plan and up to 50% of the net proceeds of the Company's initial public stock offering. The Company does not intend to employ any persons other than certain officers who are currently officers of the Bank, but will utilize the support staff of the Bank from time to time. Additional employees will be hired as appropriate to the extent the Company expands its business in the future. The directors and executive officers of the Company are set forth below. The Company's offices are located at the executive offices of the Bank at 160 Washington Street, Brookline, Massachusetts 02147. Its telephone number is (617) 730-3500. The consolidated financial statements of the Company consist of the accounts of the Company and its wholly-owned subsidiary, the Bank (along with the Bank's subsidiaries). Accordingly, filed herewith as Exhibit 99.1 for informational purposes only are the consolidated financial statements of the Bank and its subsidiaries, along with management's discussion and analysis of such consolidated financial statements, as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995. Directors and Executive Officers of the Registrant The following individuals serve as directors and executive officers of the Company: (a) Directors of the Company
Date elected to Age at Bank's August 31, Term Board Name 1997 expires of Trustees - --------------------------- ------ ------- ----------- Oliver F. Ames 76 2000 1973 Dennis S. Aronowitz 66 2000 1991 George C. Caner, Jr. 71 1999 1966 David C. Chapin 61 1998 1989 Richard P. Chapman, Jr. 62 1999 1972 William G. Coughlin 65 2000 1976 John L. Hall, II 57 1998 1983 Charles H. Peck 56 1998 1995 Hollis W. Plimpton, Jr. 67 1998 1974 Edward D. Rowley 79 1999 1966 Joseph J. Slotnik 61 2000 1970 William V. Tripp, III 59 1999 1975 Rosamond B. Vaule 59 1998 1989 Peter O. Wilde 58 1999 1993 Franklin Wyman, Jr. 76 1998 1974
(b) Executive Officers of the Company
Name Age* Position - ----------------------- ---- -------- Richard P. Chapman, Jr. 62 President and Chief Executive Officer Charles H. Peck 56 Executive Vice President Paul R. Bechet 55 Senior Vice President and Chief Financial Officer Susan M. Ginns 52 Senior Vice President and Treasurer George C. Caner, Jr. 71 Clerk
- ---------------- *As of August 31, 1997 2 (c) Biographical Information Directors of the Company Oliver F. Ames has served as a Trustee of the Bank since 1973 and a member of the Board of Investment of the Bank since 1974. Mr. Ames serves on the board of directors of a number of civic and charitable organizations. From 1962 through 1970, Mr. Ames served as a State Senator. Dennis S. Aronowitz has served as a Trustee of the Bank since 1991. In 1996, Mr. Aronowitz, an attorney, retired from Boston University where he served on the faculty of the Law School since 1967 and was Director of the Banking Law Center and Graduate Banking Law programs. He also is a trustee of a number of John Hancock mutual funds. George C. Caner, Jr. has served as a Trustee of the Bank since 1966 and also serves as the Clerk of the Bank. Mr. Caner is an attorney at the law firm of Ropes & Gray, where he was a partner from 1965 through 1996. Mr. Caner currently is Of Counsel at the firm. David C. Chapin has served as a Trustee of the Bank since 1989. Mr. Chapin is President of Cameron Properties, a real estate investment, property appraisal and management company, and has served in that capacity since 1975. Richard P. Chapman, Jr. has served as a Trustee of the Bank since 1972 and has also served as President of the Bank since 1973 and Chief Executive Officer since 1975. Mr. Chapman is also a trustee of a number of John Hancock mutual funds, a director of Lumber Insurance Cos. and a trustee of Northeastern University. William G. Coughlin has served as a Trustee of the Bank since 1976 and became a member of the Board of Investment in 1997. Mr. Coughlin is a private investor in commercial real estate. John L. Hall, II has served as a Trustee of the Bank since 1983. Mr. Hall is President of Hall Properties, Inc., a real estate investment, management and development company, and has served in that capacity since 1989. Charles H. Peck has served as a Trustee of the Bank since 1995. Mr. Peck also is an Executive Vice President of the Bank and has served as the Senior Loan Officer of the Bank since 1970. Hollis W. Plimpton, Jr. has served as a Trustee of the Bank since 1974. Reverend Plimpton is Rector of St. George's Anglican Church. Edward D. Rowley has been a Trustee of the Bank since 1966 and also serves as the Assistant Clerk of the Bank. Prior to his retirement, Mr. Rowley was associated with a retail merchandising firm and served in an administrative position at the Harvard Business School. Joseph J. Slotnik has served as a Trustee of the Bank since 1970 and a member of the Board of Investment since 1974. Mr. Slotnik is a private investor and previously was managing partner of the Boston office of a brokerage and investment firm. 3 William V. Tripp, III has served as a Trustee since 1975. Mr. Tripp is an attorney and partner at Sherburne, Powers and Needham, P.C., and has been with that firm since 1968. Rosamond B. Vaule has served as a Trustee of the Bank since 1989. Ms. Vaule is active in volunteer work for various educational and charitable organizations. Peter O. Wilde has served as a Trustee of the Bank since 1993. In 1997, Mr. Wilde became Managing Director of Beckwith Bemis Incorporated, a coatings and finishing company. Previously, he was Vice President of Finance and Administration at Ran Demo, Inc., a materials technology company, and served in that position since 1991. Franklin Wyman, Jr. has served as a Trustee of the Bank since 1974 and became a member of the Board of Investment in 1979. Mr. Wyman is Chairman and Treasurer of O'Conor, Wright, Wyman, Inc., a consulting firm providing advisory services in mergers and acquisitions, where he has been since 1984. He is also a director of Unitil Corporation, an electric utility company in New Hampshire, and a director of Fitchburg Gas & Electric Company. Executive Officers of the Company Who Are Not Directors Susan M. Ginns is Senior Vice President and Treasurer of the Bank, a position she has held since 1987. Her primary areas of responsibility include retail banking, marketing and personnel. Paul R. Bechet is Senior Vice President and Chief Financial Officer of the Bank, a position he has held since June 1997. Mr. Bechet is a certified public accountant who, prior to joining the Bank, was a partner at KPMG Peat Marwick LLP since 1972. His primary areas of responsibility include financial reporting and risk management. ITEM 2. PROPERTIES The Company conducts its business through its office at 160 Washington Street, Brookline, Massachusetts. ITEM 3. LEGAL PROCEEDINGS The Company is not party to any legal proceedings, claims or lawsuits. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the year ended December 31, 1997 to a vote of security holders. 4 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) The common stock of the Company is quoted on the Nasdaq National Market under the symbol "BRKL". As of December 31, 1997, the date for which this report is filed, there had been no trading in the common stock of the Company. (b) The effective date of the Securities Act registration statement for which use of proceeds information is being disclosed herein was January 12, 1998; the commission file number assigned to the registration statement was 333-40471. The offering commenced on or about January 28, 1998 and continued through March 3, 1998. The offering was managed on a best efforts basis by Ryan Beck & Co., Inc., as marketing agent. The securities registered were the common stock, par value $.01 per share, of the Company. In the registration statement, 15,539,050 shares of such common stock were registered at an aggregate price of $155,390,500. In the offering, 29,095,000 shares of common stock were issued, of which 13,674,650 shares were sold to the public at an aggregate purchase price of $136,746,500, and 15,420,350 shares were issued to Brookline Bancorp, MHC, the mutual holding company formed in the reorganization. In that the effective date of the registration statement was subsequent to December 31, 1997, the ending date of the reporting period for this report, the amount of expenses incurred and the amount of net offering proceeds will be reported in the Company's next periodic report filed pursuant to section 13(a) and 15(b) of the Securities Exchange Act of 1934. However, the final expenses of the reorganization and offering are not expected to exceed $2.2 million. ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA Not applicable. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Not applicable. ITEM 8. FINANCIAL STATEMENTS Not applicable. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 5 PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT See Item 1. "Directors and Executive Officers of the Registrant" for information concerning the Company's directors and executive officers. ITEM 11. EXECUTIVE COMPENSATION See Item 1. for information concerning executive compensation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Not applicable. ITEM 13. CERTAIN TRANSACTIONS Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The exhibits and financial statement schedules filed as a part of this Form 10-K are as follows: (a)(3) Exhibits 99.1 Consolidated Financial Statements of Brookline Savings Bank and subsidiaries as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995, with Report of Independent Certified Public Accountants, along with management's discussion and analysis of such Consolidated Financial Statements. (b) Reports on Form 8-K: The Registrant filed no Current Report on Form 8-K during the fourth quarter of 1997. 6 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. BROOKLINE BANCORP, INC. Date: March 27, 1998 By: /s/ Richard P. Chapman, Jr. ------------------------------------- Richard P. Chapman, Jr. President and Chief Executive Officer 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. By: /s/ Richard P. Chapman, Jr. By: /s/ Paul R. Bechet ---------------------------------------------- -------------------------------------------- Richard P. Chapman, Jr., President, Chief Paul R. Bechet, Treasurer Executive Officer and Director (Principal Financial and Accounting Officer) (Principal Executive Officer) Date: March 27, 1998 Date: March 27, 1998 By: /s/ Oliver F. Ames By: /s/ Charles H. Peck --------------------------------------- --------------------------------------- Oliver F. Ames, Director Charles H. Peck, Director By: /s/ Dennis S. Aronowitz By: /s/ Hollis W. Plimpton, Jr. --------------------------------------- --------------------------------------- Dennis S. Aronowitz, Director Hollis W. Plimpton, Jr., Director By: /s/ George C. Caner, Jr. By: /s/ Edward D. Rowley --------------------------------------- --------------------------------------- George C. Caner, Jr., Director Edward D. Rowley, Director By: /s/ David C. Chapin By: /s/ Joseph J. Slotnik --------------------------------------- --------------------------------------- David C. Chapin, Director Joseph J. Slotnik, Director By: /s/ Richard P. Chapman, Jr. By: /s/ William V. Tripp, III --------------------------------------- --------------------------------------- Richard P. Chapman, Jr., Director William V. Tripp, III, Director By: /s/ William G. Coughlin By: /s/ Rosamond B. Vaule --------------------------------------- --------------------------------------- William G. Coughlin, Director Rosamond B. Vaule, Director By: /s/ John L. Hall, II By: /s/ Peter O. Wilde --------------------------------------- --------------------------------------- John L. Hall, II, Director Peter O. Wilde, Director By: /s/ Franklin Wyman, Jr. --------------------------------------- Franklin Wyman, Jr., Director
EX-99.1 2 ADDITIONAL EXHIBITS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. The Bank's consolidated net income depends largely upon net interest income, which is the difference between interest income from loans and investments ("interest-earning assets") and interest expense on deposits and borrowed funds ("interest-bearing liabilities"). Net interest income is significantly affected by general economic conditions, policies established by regulatory authorities and competition. Comparison of Financial Condition at December 31, 1997 and December 31, 1996 Total assets were $701.1 million at December 31, 1997 compared to $667.0 million at December 31, 1996, an increase of $34.1 million, or 5.1%. This growth resulted primarily from a $15.7 million, or 3.3% increase in net loans outstanding and a $16.1 million, or 8.8%, increase in investments. Asset growth was funded primarily by an $8.7 million, or 14.4%, increase in borrowed funds and an $18.8 million, or 16.5%, increase in retained earnings. Of the $16.1 million increase in investments between December 31, 1997 and December 31, 1996, $8.4 million was attributable to higher unrealized gains on the Bank's marketable equity securities portfolio. Securities held to maturity increased by $23.8 million and short-term investments declined by $8.2 million between those respective dates. This shift resulted from the Bank's decision to improve investment yields by reducing excess liquidity and increasing its holdings of corporate obligations. Most of the debt securities purchased had maturities in the range of two years. The net increase in loans resulted from greater mortgage loan originations and less purchases of commercial loan participations. From December 31, 1996 to December 31, 1997, the most significant areas of growth were in one-to-four family mortgage loans ($11.2 million, or 19.4%), multi-family mortgage loans ($19.5 million, or 9.8%), commercial real estate mortgage loans ($10.1 million, or 7.3%) and construction and development mortgage loans ($6.1 million, or 84.3%). These increases were partially offset by a $29.0 million decrease in commercial loan participations and a modest net decrease in other loan categories. Commercial loan participations represent purchases of a portion of loans to national companies and organizations originated and serviced by money center banks. The participations generally mature between one day and three months. The Bank views such participations as an alternative investment to slightly lower-yielding short-term investments. Total deposits declined by $1.7 million, or 0.4%, from $484.0 million at December 31, 1996 to $482.3 million at December 31, 1997. The modest reduction in deposits resulted from continuation of a low interest rate environment wherein the Bank has had to compete against other instruments available to the public such as mutual funds and annuities. The decrease in deposits was more than offset by an $8.7 million increase in funds borrowed from the FHLB. The increase in retained earnings to $132.8 million at December 31, 1997, or 18.9% of total assets, resulted from net earnings of $13.7 million for the year ended December 31, 1997 and a $5.1 million increase in unrealized gains (net of taxes) on securities available for sale. Average Balance Sheets and Interest Rates The following table sets forth certain information relating to the Bank for the years ended December 31, 1997, 1996 and 1995. The average yields and costs are derived by dividing interest income or interest expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the years shown. Average balances are derived from average daily balances. The yields and costs include fees which are considered adjustments to yields.
Year ended December 31, ---------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------- ------------------------------ ----------------------------- Average Average Average Average yield/ Average yield/ Average yield/ balance Interest(1) cost balance Interest(1) cost balance Interest(1) cost -------- ----------- -------- -------- ----------- ------- ------- ----------- ------- (Dollars in thousands) Assets: Interest-earning assets: Short-term investments........ $ 9,657 $ 522 5.41% $ 14,562 $ 765 5.25% $ 2,511 $ 145 5.77% Debt securities (2)........... 147,282 8,873 6.02 135,039 8,115 6.01 154,736 8,963 5.79 Equity securities (2)......... 26,255 1,196 4.56 21,746 1,142 5.25 18,387 1,110 6.04 Mortgage loans (3)(4)......... 441,625 39,648 8.98 415,054 37,765 9.10 392,509 36,366 9.27 Commercial participation loans (3) .................. 43,631 2,491 5.71 54,076 3,007 5.56 35,766 2,166 6.06 Other commercial loans (3).... 6,201 625 10.08 3,792 345 9.10 2,624 271 10.33 Consumer loans (3)............ 1,176 122 10.37 1,098 134 12.20 1,338 146 10.91 --------- ------- -------- ------- -------- ------- Total interest-earning assets................... 675,827 53,477 7.91 645,367 51,273 7.94 607,871 49,167 8.09 ------- ------ ------- ------ ------- ---- Allowance for loan losses........ (12,428) (12,319) (12,247) Non-interest earning assets...... 15,419 15,863 18,857 --------- -------- -------- Total assets............... $ 678,818 $648,911 $614,481 ========= ======== ======== Liabilities and Retained Earnings: Interest-bearing liabilities: Deposits: NOW accounts............... $ 37,544 645 1.72% $ 37,095 641 1.73% 35,787 620 1.73% Savings accounts (5)....... 15,063 377 2.50 17,302 426 2.46 20,460 498 2.43 Money market savings accounts................. 158,578 6,109 3.85 154,541 5,957 3.85 151,334 5,665 3.74 Certificate of deposit accounts................. 260,893 14,569 5.58 262,007 14,751 5.63 252,985 14,127 5.58 --------- ------- -------- ------- -------- ------- Total deposits........... 472,078 21,700 4.60 470,945 21,775 4.62 460,566 20,910 4.54 Borrowed funds................ 63,771 4,158 6.52 55,497 3,683 6.64 46,172 3,028 6.56 --------- ------- -------- ------- -------- ------- Total interest-bearing liabilities............ 535,849 25,858 4.83 526,442 25,458 4.84 506,738 23,938 4.72 ------- ------ ------- ----- ------- ---- Non-interest-bearing demand checking accounts.............. 9,890 9,595 8,266 Other liabilities................ 10,343 5,808 6,553 --------- -------- -------- Total liabilities........ 556,082 541,845 521,557 Retained earnings................ 122,736 107,066 92,924 --------- -------- -------- Total liabilities and retained earnings...... $ 678,818 $648,911 $614,481 ========= ======== ======== Net interest income (tax equivalent basis)/interest rate spread (6)................ 27,619 3.08% 25,815 3.10% 25,229 3.37% ====== ===== ==== Less adjustment of tax exempt income......................... 260 254 247 ------- ------- ------- Net interest income (4).......... $27,359 $25,561 $24,982 ======= ======= ======= Net interest margin (7).......... 4.09% 4.00% 4.15% ====== ===== ====
- ---------- (1) Tax exempt income on equity securities is included on a tax equivalent basis. (2) Average balances include unrealized gains on securities available for sale. Equity securities include marketable equity securities (preferred and common stocks) and restricted equity securities. (3) Loans on non-accrual status are included in the average balance. (4) Excluded from interest income for the year ended December 31, 1997 is $908 collected from a borrower whose loans were on non-accrual and which relates to interest earned in periods prior to January 1, 1997. (5) Savings accounts include interest-bearing mortgagors' escrow accounts. (6) Net interest spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. (7) Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets. Rate/Volume Analysis The following table presents, on a tax equivalent basis, the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected the Bank's interest income and interest expense during the years indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Year ended Year ended December 31, 1997 December 31, 1996 compared to compared to year ended year ended December 31, 1996 December 31, 1995 ---------------------------- -------------------------- Increase (decrease) Increase (decrease) due to due to ------------------- ------------------- Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- (In thousands) Assets: Interest-earning assets: Short-term investments........... $ (265) $ 22 $ (243) $ 634 $ (14) $ 620 Debt securities.................. 738 20 758 (1,174) 326 (848) Equity securities................ 218 (164) 54 187 (155) 32 Mortgage loans................... 2,391 (508) 1,883 2,060 (661) 1,399 Commercial participation loans... (594) 78 (516) 1,031 (190) 841 Other commercial loans........... 239 41 280 109 (35) 74 Consumer loans................... 9 (21) (12) (28) 16 (12) ------- ----- ------ ------- ------- ------ Total interest-earning assets. 2,736 (532) 2,204 2,819 (713) 2,106 ------- ----- ------ ------- ------- ------ Liabilities and Retained Earnings: Interest-bearing liabilities: Deposits: NOW accounts.................. 8 (4) 4 23 (2) 21 Savings accounts.............. (56) 7 (49) (78) 6 (72) Money market savings accounts. 156 (4) 152 122 170 292 Certificate of deposit accounts (63) (119) (182) 507 117 624 ------- ----- ------ ------- ------- ------ Total deposits.............. 45 (120) (75) 574 291 865 Borrowed funds................... 541 (66) 475 618 37 655 ------- ----- ------ ------- ------- ------ Total interest-bearing liabilities 586 (186) 400 1,192 328 1,520 ------- ----- ------ ------- ------- ------ Net change in net interest income... $ 2,150 $(346) $1,804 $ 1,627 $(1,041) $ 586 ======= ===== ====== ======= ======= ======
Comparison of Operating Results For the Year Ended December 31, 1997 and December 31, 1996 General. Net income for the year ended December 31, 1997 was $13.7 million, an increase of $1.8 million, or 15.0%, as compared to $11.9 million for the year ended December 31, 1996. The increase was attributable to higher net interest income of $2.7 million and a $424,000 decrease in income tax expense resulting from a lower effective income tax rate, partially offset by a $661,000 increase in non-interest expense due to higher operating costs and a $675,000 decline in non-interest income due in part to $390,000 less in gains from sales of securities. The increase in net interest income was due primarily to growth in average interest-earning assets and receipt of $908,000 in interest from a borrower whose loans were on non-accrual and which related to interest earned in periods prior to 1997. Interest Income. Interest income for the year ended December 31,1997 was $54.1 million, compared to $51.0 million for the year ended December 31, 1996, an increase of $3.1 million, or 6.1%. Excluding the receipt of $908,000 in interest income referred to in the preceding paragraph, the rate of increase over the prior year was 4.3%. Subsequent comments on income from lending activities in 1997 exclude the effect of the $908,000. Substantially all of the increase in interest income resulted from growth in average interest-earning assets of $30.5 million, or 4.7%. The principal areas of growth related to mortgage loans (up $26.6 million, or 6.4%) and debt securities (up $12.2 million, or 9.1%). Most of the mortgage loan growth resulted from originations of one-to-four family, multi-family and commercial real estate loans. The increase in debt securities resulted from a decision to shift some of the Bank's liquid funds placed in short-term investments and commercial loan participations into debt securities so as to improve asset yield. Interest Expense. Interest expense for the year ended December 31, 1997 was $25.9 million compared to $25.5 million for the year ended December 31, 1997, an increase of $400,000, or 1.6%. This increase resulted primarily from a higher average balance of interest-bearing liabilities ($9.4 million, or 1.8%) as the average rate paid on such liabilities declined by 1 basis point. Average interest-bearing deposit balances increased modestly ($1.1 million, or 0.2%) as a continued low rate environment made it difficult to attract deposits. The Bank increased its borrowings from the FHLB as part of its management of interest rate risk resulting from the origination and refinancing of multi-family and commercial real estate mortgage loans at fixed rates for certain time intervals. Interest expense on borrowed funds increased $475,000, or 12.9%, for the year ended December 31, 1997 due to an $8.3 million, or 14.9%, increase in the average balance of such funds to $63.8 million, which was partially offset by a 12 basis point reduction in the average rate paid on borrowed funds to 6.52% in 1997 compared to 6.64% in 1996. Provision for Loan Losses. The Bank did not provide for loan losses in 1997 and 1996 based on continuation of favorable trends in the various factors considered by management in evaluating the adequacy of the Bank's allowance for loan losses. Non-performing loans amounted to $803,000, or 0.16%, of total loans at December 31, 1997 and $1.3 million, or 0.28%, at December 31, 1996. At those respective dates, the allowance for loan losses was $12.5 million and $12.3 million, or 2.51% and 2.56% of total loans outstanding. Non-Interest Income. Non-interest income is comprised of fees and charges for Bank services, gains or losses from sales of assets, other real estate owned activity and other income resulting from miscellaneous transactions. Total non-interest income was $1.2 million for the year ended December 31, 1997 compared to $1.9 million for the year ended December 31, 1996, a decrease of $675,000, or 36.7%. The decrease resulted primarily from a $165,000 reduction in Bank fees and services, less gains from sales of marketable equity securities ($74,000 in 1997 compared to $464,000 in 1996) and a $61,000 reduction in income from other real estate owned activities. The decrease in Bank fees and services resulted primarily from less fees from loan prepayments and late payments. Non-Interest Expense. Non-interest expense increased by $661,000, or 8.6%, from $7.7 million for the year ended December 31, 1996 to $8.4 million for the year ended December 31, 1997. Of this increase, $568,000 related to compensation and employee benefits, which rose 12.6% to $5.1 million for the year ended December 31, 1997. The higher level of compensation and employee benefits was attributable to several factors: the addition of a chief financial officer and another commercial loan officer, increased use of temporary personnel from an outside agency because of personnel turnover, increased accruals for supplemental executive retirement costs and bonuses, a one-time charge for compensation-related costs pertaining to the creation of a real estate investment trust, increased personnel benefit costs and increased personnel training in connection with conversion to a new computer system. Occupancy expense increased $74,000, or 11.8%, to $701,000 for the year ended December 31, 1997 as a result of branch lease renewals at higher annual rental charges and the cost of refurbishings at the main office of the Bank. Equipment and data processing expense increased from $892,000 in 1996 to $1.0 million in 1997 primarily as a result of higher depreciation expense on new equipment put into use in connection with the Bank's conversion to a new computer system. Other operating expense categories did not change significantly between 1997 and 1996 except for an increase of $60,000 in FDIC deposit insurance premiums and a decrease of $100,000 in professional fees for legal and advisory services. Income Taxes. Total income tax expense for the year ended December 31, 1997 was $7.3 million compared to $7.8 million for the year ended December 31, 1996, resulting in effective tax rates of 34.8% and 39.4% for the respective years. The lower effective tax rate resulted from creation of a real estate investment trust and continued utilization of a securities investment subsidiary to substantially reduce state income taxes. The rate of federal income tax is slightly less than the statutory rate as a result of the exemption of part of the Bank's dividend income on equity securities from taxable income. Comparison of Operating Results for the Years Ended December 31, 1996 and December 31, 1995 General. Net income was $11.9 million in 1996 compared to $11.7 million in 1995, an increase of $209,000, or 1.8%. Despite an increase in average interest-earning assets of $37.5 million, or 6.2%, net interest income increased by only $579,000, or 2.3%, from $25.0 million in 1995 to $25.6 million in 1996 caused by a reduction in the Bank's interest rate spread from 3.37% in 1995 to 3.10% in 1996. The other significant factor affecting the change in net income was a $342,000 increase in the Bank's income tax expense from $7.4 million in 1995 to $7.8 million in 1996. Interest Income. Interest income was $51.0 million in 1996, compared to $48.9 million in 1995, an increase of $2.1 million, or 4.3%. A $2.8 million improvement in interest income resulting from interest-earning asset growth was partially offset by a $713,000 decline resulting from lower yields. The average yield on mortgage loans declined from 9.27% in 1995 to 9.10% in 1996 as a result of a lower prime rate and the fact that a significant portion of the Bank's mortgage loans are tied to the prime rate. As the prime rate decreased, some of the Bank's commercial real estate borrowers refinanced their loans at fixed rates for three to five year intervals so as to lock in more favorable interest rates. Increased competition within the Bank's market area facilitated the ability of borrowers to arrange such refinancings. In recognition of this trend and to protect against possible negative consequences that would result from further reductions in the prime rate, in 1996, the Bank placed more funds in short-term investments and commercial loan participations rather than longer-term debt securities. The yields on such short-term assets were lower in 1996 than in 1995. The decline in the yield on the Bank's equity securities from 6.04% in 1995 to 5.25% in 1996 was caused by the inclusion of the increased unrealized appreciation on those securities in average asset balances. Interest Expense. Interest expense increased by $1.5 million, or 6.3%, from $23.9 million in 1995 to $25.4 million in 1996. The increase resulted from a $19.7 million, or 3.9%, increase in average interest-bearing liabilities and a 12 basis point, or 2.5%, increase in the average rate paid on such liabilities. Total average interest-bearing deposits increased by $10.4 million, or 2.3%, with most of the increase occurring in certificates of deposit because of the higher rates offered on such deposits in comparison to those offered on other types of deposits. The strength of the stock market made investment in mutual funds an attractive alternative deployment of funds for many customers. Because of the level of loan refinancings at fixed rates for three-to-five year intervals, the Bank increased its borrowings from the FHLB as part of interest rate risk management. The average amount of borrowings outstanding increased by $9.3 million, or 20.2%, from $46.2 million in 1995 to $55.5 million in 1996. Provision for Loan Losses. The Bank made no provision for loan losses in 1996 and 1995 as all the significant factors considered by management in evaluating the adequacy of the Bank's allowance for loan losses remained positive. Non-performing loans were $1.3 million at the end of 1996 and $748,000 at the end of 1995, or 0.28% and 0.17% of total loans outstanding at those respective dates. Loan recoveries ($166,000) equaled loan charge-offs in 1996 and exceeded loan charge-offs ($240,000) by $52,000 in 1995. The allowance for loan losses was $12.3 million at the end of 1996 and 1995, or 2.56% and 2.75% of total loans outstanding at those respective dates. Non-Interest Income. Total non-interest income was $1.8 million in 1996, an increase of $235,000, or 14.6%, from $1.6 million in 1995. The increase in fees and charges from $759,000 in 1995 to $957,000 in 1996 was substantially attributable to a $205,000 increase in prepayment fees caused by loan payments and refinancings. Sales of marketable equity securities generated net gains of $464,000 in 1996 compared to $877,000 in 1995. Other real estate owned activity contributed income of $299,000 in 1996, compared to a loss of $40,000 in 1995, as a result of gains from sales of properties ($149,000 in 1996 and none in 1995) and income from the rental of properties exceeding property expenses by $150,000 in 1996, compared to a shortfall of $40,000 in 1995. Other income was higher in 1996 than in 1995 primarily as a result of funds received in 1996 from a settlement involving a loan-related dispute and the partial charge-off in 1995 of a miscellaneous receivable included in other assets. Non-Interest Expense. Total non-interest expense was $7.7 million in 1996, compared to $7.4 million in 1995, an increase of $263,000, or 3.5%. This increase resulted in part from a $550,000 reduction in premiums paid to the FDIC for deposit insurance. Some of this benefit was offset by an increase in professional fees resulting from implementation of a tax strategy involving creation of a real estate investment trust and a diagnostic review of the Bank's risk management process. The increase in other expenses in 1996 was also attributable to higher advertising and promotion costs and expenses incurred in connection with the Bank's conversion to a new data processing system. Income Taxes. Total income tax expense was $7.8 million in 1996 compared to $7.4 million in 1995. The effective tax rate was higher in 1996 (39.4%) than in 1995 (38.7%) primarily because the Bank was able to use capital loss carryforwards in 1995 to reduce part of the tax due on gains from sales of equity securities. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Trustees Brookline Savings Bank: We have audited the accompanying consolidated balance sheets of Brookline Savings Bank and subsidiaries (the Bank) as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in retained earnings and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Brookline Savings Bank and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. GRANT THORNTON LLP Boston, Massachusetts February 13, 1998 BROOKLINE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) December 31, --------------------- 1997 1996 --------- --------- ASSETS Cash and due from banks ............................... $ 8,843 $ 6,465 Short-term investments ................................ 11,670 19,870 Securities available for sale ......................... 117,637 117,372 Securities held to maturity (market value of $65,600 and $41,695, respectively) .......................... 65,444 41,620 Restricted equity securities .......................... 3,721 3,481 Loans ................................................. 496,412 480,683 Allowance for loan losses ............................. (12,463) (12,326) --------- --------- Net loans ........................................ 483,949 468,357 --------- --------- Accrued interest receivable ........................... 5,240 5,106 Bank premises and equipment, net ...................... 1,361 1,442 Other real estate owned, net .......................... 2,373 1,689 Deferred income tax asset, net ........................ -- 875 Other assets .......................................... 881 711 --------- --------- Total assets ..................................... $ 701,119 $ 666,988 ========= ========= LIABILITIES AND RETAINED EARNINGS Deposits .............................................. $ 482,304 $ 484,016 Borrowed funds ........................................ 69,265 60,565 Mortgagors' escrow accounts ........................... 2,896 2,777 Income taxes payable .................................. 5,901 1,399 Deferred income tax liability, net .................... 2,041 -- Accrued expenses and other liabilities ................ 5,955 4,284 --------- --------- Total liabilities ................................ 568,362 553,041 --------- --------- Commitments and contingencies Retained earnings: Retained earnings ................................... 119,018 105,287 Net unrealized gain on securities available for sale, net of taxes ............................ 13,739 8,660 --------- --------- Total retained earnings .......................... 132,757 113,947 --------- --------- Total liabilities and retained earnings .......... $ 701,119 $ 666,988 ========= ========= See accompanying notes to the consolidated financial statements. BROOKLINE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, ------------------------------ 1997 1996 1995 -------- -------- -------- (In thousands) Interest income: Loans ................................................... $ 43,794 $ 41,251 $ 38,949 Debt securities ......................................... 8,873 8,115 8,963 Marketable equity securities ............................ 715 697 678 Restricted equity securities ............................ 220 191 185 Short-term investments .................................. 523 765 145 -------- -------- -------- Total interest income ................................ 54,125 51,019 48,920 -------- -------- -------- Interest expense: Deposits ................................................ 21,700 21,775 20,910 Borrowed funds .......................................... 4,158 3,683 3,028 -------- -------- -------- Total interest expense ............................... 25,858 25,458 23,938 -------- -------- -------- Net interest income ....................................... 28,267 25,561 24,982 Provision for loan losses ................................. -- -- -- -------- -------- -------- Net interest income after provision for loan losses .. 28,267 25,561 24,982 -------- -------- -------- Non-interest income: Fees and charges ........................................ 792 957 759 Gains on sales of securities, net ....................... 74 464 877 Other real estate owned income (expense), net ........... 238 299 (40) Other income ............................................ 61 120 9 -------- -------- -------- Total non-interest income ............................ 1,165 1,840 1,605 -------- -------- -------- Non-interest expense: Compensation and employee benefits ...................... 5,081 4,513 4,395 Occupancy ............................................... 701 627 579 Equipment and data processing ........................... 1,041 892 882 Deposit insurance premiums .............................. 71 11 561 Other ................................................... 1,480 1,670 1,033 -------- -------- -------- Total non-interest expense ........................... 8,374 7,713 7,450 -------- -------- -------- Income before income taxes ................................ 21,058 19,688 19,137 Provision for income taxes ................................ 7,327 7,751 7,409 -------- -------- -------- Net income ........................................... $ 13,731 $ 11,937 $ 11,728 ======== ======== ========
See accompanying notes to the consolidated financial statements. BROOKLINE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS Years ended December 31, 1997, 1996 and 1995 (In thousands)
Net unrealized gain on securities available Retained for sale, earnings net of taxes Total -------- ------------ ----- Balance at December 31, 1994.............................. $ 81,622 $ 4,100 $ 85,722 Net income for the year ended December 31, 1995........ 11,728 -- 11,728 Change in net unrealized gain on securities available for sale, net of taxes for the year ended December 31, 1995.................................... -- 3,133 3,133 ---------- --------- ---------- Balance at December 31, 1995.............................. 93,350 7,233 100,583 Net income for the year ended December 31, 1996........ 11,937 -- 11,937 Change in net unrealized gain on securities available for sale, net of taxes for the year ended December 31, 1996.................................... -- 1,427 1,427 ---------- --------- ---------- Balance at December 31, 1996.............................. 105,287 8,660 113,947 Net income for the year ended December 31, 1997........ 13,731 -- 13,731 Change in net unrealized gain on securities available for sale, net of taxes for the year ended December 31, 1997.................................... -- 5,079 5,079 ---------- --------- ---------- Balance at December 31, 1997.............................. $ 119,018 $ 13,739 $ 132,757 ========== ========= ==========
See accompanying notes to the consolidated financial statements. BROOKLINE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year ended December 31, ----------------------------------- 1997 1996 1995 --------- --------- --------- Cash flows from operating activities: Net income .................................................... $ 13,731 $ 11,937 $ 11,728 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ............................... -- -- -- Provision for other real estate owned ................... -- -- -- Depreciation and amortization ........................... 450 261 227 Amortization, net of accretion, of securities premiums and discounts ......................................... 633 526 1,226 Accretion of deferred loan origination fees and unearned discounts ................................ (592) (619) (151) Net gains from sales of securities ...................... (74) (464) (877) Net gains from sales of other real estate owned ......... (12) (149) -- Deferred income taxes ................................... (302) 21 (272) (Increase) decrease in: Accrued interest receivable ........................... (134) 487 (629) Other assets .......................................... (202) 6 198 Increase (decrease) in: Income taxes payable .................................. 4,450 (640) 495 Accrued expenses and other liabilities ................ 1,671 330 606 --------- --------- --------- Net cash provided by operating activities .......... 19,619 11,696 12,551 --------- --------- --------- Cash flows from investing activities: Proceeds from sales of securities available for sale .......... 752 2,712 1,256 Proceeds from redemptions and maturities of securities available for sale ......................................... 50,956 25,583 20,943 Proceeds from redemptions and maturities of securities held to maturity ........................................... 21,693 110,400 48,159 Purchase of securities available for sale ..................... (43,651) (61,316) (27,241) Purchase of securities held to maturity ....................... (46,049) (63,077) (39,499) Purchase of Federal Home Loan Bank of Boston stock ............ (240) (613) (113) Net increase in loans ......................................... (45,883) (28,644) (22,787) Proceeds from sales of participations in loans ................ 1,198 5,965 3,000 Purchase of bank premises and equipment ....................... (344) (570) (218) Capital expenditures on other real estate owned ............... (88) (17) (49) Proceeds from sales of other real estate owned ................ 158 1,284 219 --------- --------- --------- Net cash used for investing activities ................ (61,498) (8,293) (16,330) --------- --------- --------- Cash flows from financing activities: Increase (decrease) in demand deposits and NOW, savings and money market savings accounts .............................. 3,982 8,918 (18,987) Increase (decrease) in certificates of deposit ................ (5,694) 883 21,391 Proceeds from Federal Home Loan Bank of Boston advances ....... 25,792 22,796 19,900 Repayment of Federal Home Loan Bank of Boston advances ........ (17,092) (11,896) (13,500) Increase in mortgagors' escrow accounts ....................... 119 403 114 --------- --------- --------- Net cash provided by financing activities .......... 7,107 21,104 8,918 --------- --------- --------- Net increase (decrease) in cash and cash equivalents ............ (34,772) 24,507 5,139 Cash and cash equivalents at beginning of period ................ 79,285 54,778 49,639 --------- --------- --------- Cash and cash equivalents at end of period ...................... $ 44,513 $ 79,285 $ 54,778 ========= ========= =========
BROOKLINE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
Year ended December 31, ----------------------------------- 1997 1996 1995 --------- --------- --------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest on deposits and borrowed funds.................. $ 25,813 $ 26,491 $ 23,727 Income taxes............................................. 3,309 8,361 7,190 Non-cash activities: Transfers from loans to other real estate owned.......... 728 1,096 95 Transfer of investment securities from held to maturity to available for sale................................. -- -- 25,952
See accompanying notes to the consolidated financial statements. BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (1) Summary of Significant Accounting Policies and Related Matters Brookline Savings Bank and its subsidiaries (collectively the "Bank") operate five full service banking offices located in Brookline, Massachusetts. The Bank's primary activities include acceptance of deposits from the general public, origination of mortgage loans on residential and commercial real estate located principally in Massachusetts, and investment in debt and equity securities. The Bank is subject to competition from other financial and non-financial institutions. As a Massachusetts chartered savings bank whose deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") and the Deposit Insurance Fund, the activities of the Bank are subject to regulation, supervision and examination by federal and state authorities. (a) Principles of Consolidation and Basis of Financial Statement Presentation The consolidated financial statements include the accounts of Brookline Savings Bank and its wholly-owned subsidiaries, 160 Associates, Inc. ("Associates") and BBS Investment Corporation ("BBS"). Through 1996, Associates engaged in marketing services at immaterial levels of activity. In 1997, Brookline Preferred Capital Corporation ("BPCC") was established as a 99.9% owned subsidiary of Associates. BPCC is a real estate investment trust that owns and manages real estate mortgage loans originated by the Bank. BBS is engaged in buying, selling and holding investment securities. All significant intercompany transactions and balances are eliminated in consolidation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on unanticipated changes in economic conditions, particularly in the Boston metropolitan area and eastern Massachusetts. In addition, the FDIC and the Massachusetts Division of Banks, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. (b) Cash Equivalents For purposes of reporting cash flows, cash equivalents include highly liquid assets with an original maturity of three months or less. Highly liquid assets include cash and due from banks, short-term investments and commercial loan participations. (c) Securities Marketable equity securities and debt securities are classified as either trading account securities, held to maturity securities (applicable only to debt securities) or available for sale securities. Management determines the classification of securities at the time of purchase. BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 Trading account securities are carried at estimated fair value with unrealized gains and losses included in earnings. None of the securities purchased by the Bank have been classified as trading account securities. Debt securities for which the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. Those securities held for indefinite periods of time and not intended to be held to maturity are classified as available for sale. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates or other business factors. Securities available for sale are carried at estimated fair value. Unrealized gains (losses) are reported as a separate component of retained earnings, net of related income taxes. Restricted equity securities are carried at cost. In November 1995, FASB issued an implementation guide for Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," that allowed banks a one-time opportunity from mid-November 1995 to December 31, 1995 to reassess investment classifications and reclassify securities in the held to maturity and available for sale categories without tainting the remainder of the portfolio not reclassified. In connection with this opportunity, the Bank reclassified $26.0 million of debt securities from the held to maturity category to the available for sale category. Retained earnings increased by $62,000 as a result of the reclassification. Premiums and discounts on debt securities are amortized to expense and accreted to income over the estimated life of the respective security using a method which approximates the interest method. Security transactions are recorded on the trade date. Realized gains and losses are determined using the specific identification method. Security valuations are reviewed and evaluated periodically by management. If the decline in the value of any security is deemed to be other than temporary, the security is written down to a new cost basis and the resulting loss is charged to income. (d) Loans Loans are reported at the principal amount outstanding, reduced by net deferred loan origination fees, unearned discounts and unadvanced funds due mortgagors on uncompleted loans. Loan origination fees and direct loan origination costs are deferred, and the net fee or cost is recognized in interest income using the interest method. Deferred amounts are recognized for fixed rate loans over the contractual life of the loans and for adjustable rate loans over the period of time required to adjust the contractual interest rate to a yield approximating a market rate at origination date. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full timely collection of interest and principal or when a loan becomes past due 90 days. All interest previously accrued and not collected is reversed against interest income. Interest payments received on non-accrual and impaired loans are recognized as income unless further collections are doubtful, in which case the payments are applied as a reduction of principal. Loans are generally returned to accrual status when principal and interest payments are current, full collectibility of principal and interest is reasonably assured and a consistent record of performance (generally six months) has been achieved. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect principal or interest due according to the contractual terms of the loan. Impaired loans are measured and reported based on one of three methods: the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral if the loan BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 is collateral dependent. If the measure is less than an impaired loan's recorded investment, an impairment loss is recognized as part of the allowance for loan losses. (e) Allowance for Loan Losses The allowance for loan losses is based on a periodic analysis of the loan portfolio by management of the amount deemed necessary to adequately provide for losses in the loan portfolio. Factors considered in making the evaluation 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. Provisions for losses are charged to income. Loans are charged off against the allowance when the collectibility of principal is unlikely. Recoveries of loans previously charged off are credited to the allowance. (f) Bank Premises and Equipment Bank premises and equipment are carried at cost less accumulated depreciation and amortization, except for land which is carried at cost. Bank premises and equipment are depreciated using the straight-line method over the estimated useful life of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the improvements. (g) Other Real Estate Owned Other real estate owned is comprised of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. Such properties are recorded initially at estimated fair value less costs to sell. When a property is acquired, the excess of the loan balance over the estimated fair value is charged to the allowance for loan losses. An allowance for losses on other real estate owned is established by a charge to income when, upon periodic evaluation by management, further declines in the estimated fair value of properties have occurred. Such evaluations are based on an analysis of individual properties as well as a general assessment of current real estate market conditions. Holding costs and rental income on properties are included in current operations while certain costs to improve such properties are capitalized. Gains and losses from the sale of properties are reflected in operating results when realized. (h) Employee Benefits The Bank accounts for pension and post-retirement benefits on the net periodic cost method. This method recognizes the compensation cost of employee benefits over each employee's estimated service life. Pension costs are funded based on the maximum amount that can be deducted for federal income tax purposes. BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 (i) Income Taxes The Bank utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (j) New Accounting Pronouncements Effective January 1, 1997, the Bank adopted SFAS No. 125, "Accounting for Transfers of Financial Assets and Extinguishment of Liabilities." This Statement is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, and is to be applied prospectively. However, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125," requires the deferral of implementation as it relates to repurchase agreements, dollar-rolls, securities lending and similar transactions until years beginning after December 31, 1997. Earlier or retroactive application of this Statement is not permitted. Adoption of SFAS No. 125 did not and SFAS No. 127 is not expected to have a significant effect on the Bank's financial position or results of operations. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This Statement requires entities presenting a complete set of financial statements to include details of comprehensive income that arise in the reporting period. Comprehensive income consists of net income or loss for the current period and other comprehensive income consisting of revenue, expenses, gains and losses that bypass the income statement and are reported directly in a separate component of equity. Other comprehensive income includes, for example, unrealized gains and losses on certain investment securities, minimum pension liability adjustments and foreign currency items. This Statement requires that components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. At December 31, 1997, the Bank's other comprehensive income consisted of unrealized gains on securities classified as available for sale. This Statement is effective for fiscal years beginning after December 31, 1997 and requires restatement of prior period financial statements presented for comparative purposes. (2) Cash and Short-Term Investments (In Thousands) Aggregate reserves (in the form of deposits with the Federal Reserve Bank and vault cash) of $1,558 and $1,155 were maintained to satisfy federal regulatory requirements at December 31, 1997 and 1996, respectively. Short-term investments are summarized as follows: December 31, ------------------------- 1997 1996 -------- -------- Money market funds......................... $ 7,570 $ 15,870 Federal funds.............................. 4,000 4,000 Term deposit............................... 100 -- -------- -------- $ 11,670 $ 19,870 ======== ======== BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 Short-term investments are stated at cost which approximates market. Money market funds are invested in a mutual fund whose assets are comprised primarily of U.S. Treasury obligations, commercial paper and certificates of deposit with average maturities of 90 days or less. (3) Investment Securities (In Thousands) Securities available for sale and held to maturity are summarized below:
December 31, 1997 -------------------------------------------- Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value -------- -------- ------- --------- Securities available for sale: Debt securities: U.S. Government and Agency obligations.................... $ 74,088 $ 213 $ 14 $ 74,287 Corporate obligations..................................... 15,341 16 24 15,333 -------- -------- ------- --------- Total debt securities................................... 89,429 229 38 89,620 Marketable equity securities................................ 6,168 21,881 32 28,017 -------- -------- ------- --------- Total securities available for sale..................... $ 95,597 $ 22,110 $ 70 $ 117,637 ======== ======== ======= ========= Securities held to maturity: U.S. Government and Agency obligations...................... $ 8,032 $ 4 $ 4 $ 8,032 Corporate obligations....................................... 56,147 123 16 56,254 Mortgage-backed securities.................................. 1,265 56 7 1,314 -------- -------- ------- --------- Total securities held to maturity....................... $ 65,444 $ 183 $ 27 $ 65,600 ======== ======== ======= ========= December 31, 1996 -------------------------------------------- Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value -------- -------- ------- --------- Securities available for sale: Debt securities: U.S. Government and Agency obligations.................... $ 57,089 $ 101 $ 86 $ 57,104 Corporate obligations..................................... 39,890 73 60 39,903 -------- -------- ------- --------- Total debt securities................................... 96,979 174 146 97,007 Marketable equity securities................................ 6,703 13,750 88 20,365 -------- -------- ------- --------- Total securities available for sale..................... $103,682 $ 13,924 $ 234 $ 117,372 ======== ======== ======= ========= Securities held to maturity: U.S. Government and Agency obligations...................... $ 12,951 $ 3 $ 1 $ 12,953 Corporate obligations....................................... 25,905 45 15 25,935 Mortgage-backed securities.................................. 2,764 54 11 2,807 -------- -------- ------- --------- Total securities held to maturity....................... $ 41,620 $ 102 $ 27 $ 41,695 ======== ======== ======= =========
BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 Restricted equity securities are as follows: December 31, --------------------- 1997 1996 -------- -------- Federal Home Loan Bank of Boston stock................... $ 3,468 $ 3,228 Massachusetts Savings Bank Life Insurance Company stock................................ 253 253 -------- -------- $ 3,721 $ 3,481 ======== ======== As a voluntary member of the Federal Home Loan Bank of Boston ("FHLB"), the Bank is required to invest in $100 par value stock of the FHLB in an amount equal to 1% of its outstanding home loans or 5% of its outstanding advances from the FHLB, whichever is higher. As and when such stock is redeemed, the Bank would receive from the FHLB an amount equal to the par value of the stock. At its discretion, the FHLB may declare dividends on the stock. Such dividends amounted to $212, $183 and $178 for the years ended December 31, 1997, 1996 and 1995, respectively. The maturities of the investments in debt securities at December 31, 1997 are as follows: Available for sale -------------------------- Amortized Estimated Maturity cost fair value - -------- --------- --------- Within 1 year...................................... $ 47,176 $ 47,224 After 1 year through 5 years....................... 42,054 42,206 After 5 years through 10 years..................... 199 190 -------- --------- $ 89,429 $ 89,620 ======== ========= Held to maturity -------------------------- Amortized Estimated Maturity cost fair value - -------- --------- --------- Within 1 year...................................... $ 20,854 $ 20,868 After 1 year through 5 years....................... 43,225 43,318 After 5 years through 10 years..................... 404 401 Over 10 years...................................... 961 1,013 -------- --------- $ 65,444 $ 65,600 ======== ========= Mortgage-backed securities are included above based on their contractual maturities (primarily in excess of 10 years); the expected lives, however, are expected to be shorter due to anticipated payments. Sales of investment securities, all of which were marketable equity securities, are summarized as follows: Year ended December 31, --------------------------------- 1997 1996 1995 --------- --------- ------ Proceeds from sales....................... $ 752 $ 2,712 $ 1,256 Gross gains from sales.................... 74 469 1,006 Gross losses from sales................... -- 5 129 BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 (4) Loans (In Thousands) A summary of loans follows: December 31, ---------------------------- 1997 1996 ---------- ----------- Mortgage loans: One-to-four family ....................... $ 68,907 $ 57,725 Multi-family.............................. 219,909 200,368 Commercial real estate.................... 149,540 139,430 Construction and development.............. 13,382 7,261 Home equity............................... 5,276 6,398 Second.................................... 15,855 19,872 ---------- ----------- Total mortgage loans.................. 472,869 431,054 ---------- ----------- Commercial loans: Participations............................ 24,000 52,950 Other..................................... 9,074 9,221 ---------- ----------- Total commercial loans................ 33,074 62,171 ---------- ----------- Consumer loans.............................. 1,393 1,023 ---------- ----------- Total gross loans..................... 507,336 494,248 Unadvanced funds on loans................... (9,352) (11,950) Deferred loan origination fees.............. (1,562) (1,326) Unearned discounts.......................... (10) (289) ---------- ----------- $ 496,412 $ 480,683 ========== =========== The Bank's portfolio, other than commercial loan participations, is substantially concentrated within Massachusetts. Commercial loan participations represent purchases of a portion of loans to national companies and organizations originated and serviced by money center banks. Such participations generally mature between one day and three months. Non-accrual loans amounted to $803 and $1,337 at December 31, 1997 and 1996, respectively. If interest payments on all non-accrual loans for the years ended December 31, 1997, 1996 and 1995 had been made in accordance with original loan agreements, interest income of $80, $201 and $90 would have been recognized on the loans compared to interest income actually recognized of $6, $39 and $38, respectively. Restructured loans amounted to $2,287 and $5,438 at December 31, 1997 and 1996, respectively. Restructured loans represent performing multi-family and commercial real estate mortgage loans for which concessions (such as reductions of interest rates to below market terms and/or extension of repayment terms) have been granted due to the borrower's financial condition. At December 31, 1997, there were no outstanding commitments to lend additional funds to borrowers with restructured loans. If interest payments on all restructured loans for the years ended December 31, 1997, 1996 and 1995 had been made in accordance with original loan agreements, interest income of $271, $993 and $989 would have been recognized on the loans compared to interest income actually recognized of $115, $1,080 and $653, respectively. BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 The recorded investment in impaired loans, as defined by SFAS No. 114 at the dates indicated, is as follows: December 31, --------------------- 1997 1996 -------- --------- Multi-family mortgage loans.............................. $ 134 $ 768 Commercial real estate mortgage loans.................... 2,032 5,097 Construction and development mortgage loans.............. -- 687 -------- --------- $ 2,166 $ 6,552 ======== ========= Average recorded investment in impaired loans for the the years ended December 31, 1997 and 1996............. $ 4,359 $ 11,427 ======== ========= Impaired loans for which an allowance for impairment was not required primarily due to prior charge-offs and/or the sufficiency of collateral values amounted to $2,166 and $1,527 at December 31, 1997 and 1996, respectively. The remaining impaired loans of $0 and $5,025 at those dates had an allowance for impairment of $0 and $1,009 respectively, all of which was included in the overall allowance for loan losses. Interest income recognized on impaired loans, all of which was recorded on a cash basis, was $183, $844 and $1,099 for the years ended December 31, 1997, 1996 and 1995, respectively. A portion of certain commercial real estate loans originated and serviced by the Bank are sold periodically to other banks on a non-recourse basis. The balance of loans acquired by other banks amounted to $13,610 and $17,277 at December 31, 1997 and 1996, respectively. No fees are collected by the Bank for servicing such loan participations. In the ordinary course of business, the Bank makes loans to its Trustees and their related interests, generally at the same prevailing terms as those of other borrowers. A summary of related party activity follows: Year ended December 31, ----------------------- 1997 1996 ------- ------- Balance at beginning of year........................ $ 571 $ 827 Repayments.......................................... 11 256 ------ ------- Balance at end of year.............................. $ 560 $ 571 ====== ======= (5) Allowance for Loan Losses (In Thousands) An analysis of the allowance for loan losses for the years indicated follows: Year ended December 31, ----------------------------------- 1997 1996 1995 --------- --------- --------- Balance at beginning of year............. $ 12,326 $ 12,326 $ 12,274 Provision for loan losses................ -- -- -- Charge-offs.............................. (6) (166) (240) Recoveries............................... 143 166 292 --------- --------- --------- Balance at end of year................... $ 12,463 $ 12,326 $ 12,326 ========= ========= ========= BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 (6) Bank Premises and Equipment (In Thousands) Bank premises and equipment consist of the following: December 31, --------------------- 1997 1996 -------- --------- Land................................................... $ 62 $ 62 Office building and improvements....................... 1,917 1,815 Furniture, fixtures and equipment...................... 1,737 1,495 -------- -------- 3,716 3,372 Accumulated depreciation and amortization.............. 2,355 1,930 -------- -------- $ 1,361 $ 1,442 ======== ======== (7) Other Real Estate Owned (In Thousands) The composition of other real estate owned as of the dates indicated is as follows: December 31, ------------------------ 1997 1996 -------- --------- Commercial real estate............................... $ 1,902 $ 1,840 Residential.......................................... 657 70 -------- --------- 2,559 1,910 Valuation allowance.................................. 186 221 -------- --------- $ 2,373 $ 1,689 ======= ========= An analysis of the valuation allowance for the years indicated follows: Year ended December 31, ------------------------------- 1997 1996 1995 ------- ------- ------- Balance at beginning of year................ $ 221 $ 319 $ 403 Provision for losses........................ -- -- -- Write-downs................................. (35) (98) (84) ------- ------- ------ Balance at end of year...................... $ 186 $ 221 $ 319 ======= ======= ====== Net other real estate owned income (expense) for the years indicated is comprised of the following: Year ended December 31, ------------------------------- 1997 1996 1995 ------- ------- ------ Rental income................................ $ 361 $ 272 $ 168 Provision for losses......................... -- -- -- Operating and foreclosure expenses........... (135) (122) (208) Gains from sales............................. 12 149 -- ------- ------- ------ $ 238 $ 299 $ (40) ======= ======= ====== BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 (8) Deposits (Dollars In Thousands) A summary of deposits follows:
December 31, 1997 December 31, 1996 ---------------------- ---------------------- Weighted Weighted average average Amount rate Amount rate ------ ---- ------ ---- Demand checking accounts.................................. $ 10,582 0.00% $ 9,988 0.00% NOW accounts.............................................. 40,211 1.75 38,560 1.75 Savings accounts.......................................... 14,090 2.50 15,578 2.50 Money market savings accounts............................. 161,335 3.88 158,110 3.85 --------- --------- Total transaction deposit accounts................... 226,218 3.23 222,236 3.22 --------- --------- Certificate of deposit accounts maturing: Within six months...................................... 136,788 5.44 121,116 5.30 After six months but within 1 year..................... 65,771 5.52 74,709 5.55 After 1 year but within 2 years........................ 26,336 5.97 36,917 5.85 After 2 years but within 3 years....................... 16,600 6.68 13,135 6.18 After 3 years.......................................... 10,591 6.13 15,903 6.76 --------- --------- Total certificate of deposit accounts................ 256,086 5.62 261,780 5.58 --------- --------- $ 482,304 4.50% $ 484,016 4.50% ========= =========
Certificate of deposit accounts issued in amounts of $100 or more totaled $42,423 and $38,251 at December 31, 1997 and 1996, respectively. Interest expense on deposit balances is summarized as follows: Year ended December 31, --------------------------------- 1997 1996 1995 --------- --------- --------- NOW accounts................................ $ 645 $ 641 $ 620 Savings accounts............................ 377 426 498 Money market savings accounts............... 6,109 5,957 5,665 Certificate of deposit accounts............. 14,569 14,751 14,127 --------- --------- --------- $ 21,700 $ 21,775 $ 20,910 ========= ========= ========= BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 (9) Borrowed Funds (Dollars In Thousands) Borrowed funds are comprised of the following advances from the FHLB: December 31, 1997 December 31, 1996 --------------------- -------------------- Weighted Weighted average average Amount rate Amount rate ------ ---- ------ ---- Within 1 year................ $ 20,665 5.98% $ 15,100 6.97% Over 1 year to 2 years....... 11,550 6.79 20,665 5.98 Over 2 years to 3 years...... 9,400 6.24 10,550 6.83 Over 3 years to 4 years...... 9,350 6.66 4,900 6.13 Over 4 years to 5 years...... 15,300 6.32 9,350 6.65 Over 5 years ............... 3,000 6.39 -- -- --------- --------- $ 69,265 6.33% $ 60,565 6.49% ========= ========= The advances are secured by all the Bank's stock and deposits in the FHLB and a general lien on one-to-four family residential mortgage loans and U.S. Government and Agency obligations in an aggregate amount equal to outstanding advances. (10) Income Taxes (Dollars in Thousands) Provision for income taxes are comprised of the following amounts: Year ended December 31, ----------------------------------- 1997 1996 1995 --------- --------- --------- Current: Federal.......................... $ 7,474 $ 5,957 $ 5,855 State............................ 155 1,773 1,826 --------- --------- --------- 7,629 7,730 7,681 --------- --------- --------- Deferred: Federal.......................... (384) (31) (238) State............................ 82 52 (34) --------- --------- --------- (302) 21 (272) ---------- --------- --------- $ 7,327 $ 7,751 $ 7,409 ========= ========= ========= The reduction in state income tax expense for the year ended December 31, 1997 is attributable primarily to the establishment of a real estate investment trust. BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 Total income tax expense differed from the amounts computed by applying the statutory U.S. federal income tax rate (between 34% and 35% for the years presented) to income before tax expense as a result of the following:
Year ended December 31, ---------------------------------- 1997 1996 1995 -------- -------- --------- Expected income tax expense at statutory federal tax rate....................... $ 7,322 $ 6,891 $ 6,583 State taxes, net of federal income tax benefit..... 155 1,204 1,183 Dividend income received deduction................. (173) (167) (163) Change in federal tax rate applied to deferred income taxes..................................... -- (123) -- Utilization of capital loss carryforward........... -- -- (124) Other, net......................................... 23 (54) (70) -------- -------- -------- $ 7,327 $ 7,751 $ 7,409 ======== ======== ======== Effective income tax rates......................... 34.8% 39.4% 38.7% ==== ==== ====
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at the dates indicated are as follows: December 31, -------------------- 1997 1996 ------- -------- Deferred tax assets: Allowance for loan losses........................... $ 5,187 $ 5,253 Pension and postretirement benefits................. 1,296 1,026 Loan origination fees............................... -- 80 Other............................................... 164 8 ------- -------- Total gross deferred tax assets................... 6,647 6,367 ------- -------- Deferred tax liabilities: Unrealized gain on available for sale securities.... 8,301 5,032 Post-1987 bad debt reserves......................... 153 256 Savings Bank Life Insurance Company stock........... 108 108 Other............................................... 126 96 ------- -------- Total gross deferred tax liabilities.............. 8,688 5,492 ------- -------- Net deferred tax asset (liability)................ $(2,041) $ 875 ======= ======== For income tax purposes, in 1997, the Bank changed its fiscal year end date from October 31 to December 31. Historically, the Bank has been subject to special provisions in the tax law regarding allowable tax bad debt deductions and related reserves. Bad debt deductions were determined based on loss experience or a percentage of taxable income. The bad debt reserve balance represents allowable deductions in excess of actual losses and consists of a defined base-year amount (accumulated through October 31, 1988) and additional amounts accumulated after that date. Tax law changes were enacted in August 1996 that eliminated use of the percentage of taxable income method for tax years after 1995 (after October 31, 1996 in the case of the Bank) and required recapture into taxable income over a six year period all bad debt reserves accumulated after October 31, 1988. The Bank had previously recorded a deferred tax liability with respect to these post-1987 reserves and, therefore, this new requirement had no effect on the Bank's income tax expense or net income. BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 The tax law changes also require recapture of pre-1988 bad debt reserves into taxable income if the Bank makes "non-dividend distributions." Non-dividend distributions is defined as distributions in excess of the Bank's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. The amount of additional taxable income from a non-dividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if after Conversion (see note 15), the Bank makes a non-dividend distribution to the Company, approximately one and one-half times the amount of such distribution (but not in excess of the amount of such reserves) would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. The Bank does not intend to pay dividends that would result in recapture of any portion of its bad debt reserves, and accordingly, has not provided for any portion of the $772 liability relating to the balance of its pre-1988 bad debt reserves. (11) Employee Benefits (Dollars In Thousands) Pension Plan The Bank sponsors a non-contributory defined benefit pension plan that covers all employees who meet specific age and length of service requirements, which is administered by the Savings Banks Employees Retirement Association ("SBERA"). The plan provides for benefits to be paid to eligible employees at retirement based primarily upon their years of service with the Bank and the average of their three highest consecutive years of compensation. The Bank's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attained to date, but also for those expected to be earned in the future. The plan assets are invested primarily in U.S. Government obligations, corporate bonds and equity securities. The following table sets forth the funded status of the plan for the years ended October 31, the plan's latest valuation dates, as determined by the plan's actuary: 1997 1996 ------- ------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $3,056 and $2,997.......................... $ 3,084 $ 3,060 ======= ======= Projected service obligation for service rendered to date... $ 4,706 $ 4,338 Plan assets at fair value................................... 5,523 4,833 ------- ------- Plan assets greater than projected benefit obligation.. 817 495 Unamortized transition assets............................... (58) (61) Unrecognized net gain....................................... (2,055) (1,615) ------- ------- Accrued pension expense................................ $(1,296) $(1,181) ======= ======= BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 Net pension expense for the years ended October 31 follows: 1997 1996 1995 ------- ------- ------ Service cost-benefits earned during the year...... $ 247 $ 276 $ 207 Interest cost on projected benefit obligation..... 325 328 325 Actual return on plan assets...................... (730) (618) (695) Amortization of net losses........................ 273 279 385 ------- ------- ------- Net pension expense.......................... $ 115 $ 265 $ 222 ======= ======= ======= Net pension expense for the years ended December 31, 1997, 1996 and 1995 amounted to $82, $264 and $327, respectively. Assumptions used in determining the actuarial present value of projected benefit obligations and pension expense follow: 1997 1996 1995 ------- ------- ------ Discount rate.................................... 7.25% 7.00% 8.00% Rate of increase in compensation................. 6.00 6.00 7.00 Expected long-term rate of return on assets...... 8.00 8.00 7.00 Supplemental Executive Retirement Agreements The Bank maintains agreements that provide supplemental retirement benefits to certain executive officers. Total expenses for benefits payable under the agreements amounted to $503, $311 and $284 for the years ended December 31, 1997, 1996 and 1995, respectively. Aggregate benefits payable included in accrued expenses and other liabilities at December 31, 1997 and 1996 amounted to $1,548 and $1,045, respectively. 401(K) Plan The Bank has an employee tax deferred thrift incentive plan under Section 401(k) of the Internal Revenue Code. All employees who meet specified age and length of service requirements are eligible for voluntary participation in the plan. The plan is administered by SBERA and the Bank makes no contribution to the Plan. Other Postretirement Benefits The Bank provides for part of the annual expense of health insurance for certain retired employees and their dependents. The Bank accrues the cost of these benefits over the years employees provide service to the date of their eligibility for such benefits. The transition obligation for future benefits is being amortized over a twenty year period. BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 The following is a reconciliation of the postretirement benefit obligations and the amount of accrued postretirement benefit cost included in the consolidated balance sheet as of October 31, the latest valuation date. 1997 1996 ----- ----- Actuarial present value of postretirement benefit obligations: Retirees .................................................. $ 106 $ 111 Fully eligible employees .................................. 58 54 Other active employees .................................... 245 201 ----- ----- Accumulated postretirement benefit obligation (unfunded) 409 366 Unamortized net transition obligation ..................... (313) (317) Unrecognized net gain ..................................... 74 76 ----- ----- Total accrued postretirement benefit cost .............. $ 170 $ 125 ===== ===== The components of postretirement benefit expense for the years ended December 31 were as follows: 1997 1996 1995 ---- ---- ---- Service cost-benefits earned during the year ........ $ 29 $ 24 $ 23 Interest cost on accumulated postretirement benefit obligation ................................ 26 26 27 Amortization of transition obligation ............... 13 18 18 ---- ---- ---- Net postretirement benefit expense ............. $ 68 $ 68 $ 68 ==== ==== ==== The discount rate used to determine the accumulated postretirement benefit obligations was 7.50% in 1997, 1996 and 1995. The assumed health care trend rate used to measure the accumulated postretirement benefit obligation at December 31, 1997 was 7.0% initially, decreasing gradually to 5.0% in 2001 and thereafter. A 1% point increase in the assumed health care cost trend rate would have had an immaterial impact on 1997 postretirement benefit expense and the accumulated postretirement benefit obligation at December 31, 1997. (12) Commitments and Contingencies (In Thousands) Off-Balance Sheet Financial Instruments The Bank is party to off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts reflect the extent of the involvement the Bank has in particular classes of these instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument is represented by the contractual amount of those instruments. The Bank uses the same policies in making commitments and conditional obligations as it does for on-balance sheet instruments. BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 Financial instruments with off-balance sheet risk at the dates indicated follows: December 31, --------------------- 1997 1996 --------- ------- Financial instruments whose contract amounts represent credit risk: Commitments to originate loans: Residential mortgage............................ $ 5,569 $ 4,506 Multi-family mortgage........................... 10,448 4,954 Commercial real estate mortgage................. 8,705 7,315 Construction and development mortgage........... 3,796 1,400 Commercial...................................... 3,215 2,280 Unadvanced portion of loans........................ 9,352 11,950 Unused lines of credit: Equity.......................................... 8,803 8,272 Other........................................... 1,365 1,455 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee by the customer. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if any, is based on management's credit evaluation of the borrower. Lease Commitments The Bank leases certain office space under various noncancellable operating leases. A summary of future minimum rental payments under such leases at the dates indicated follows: Year ending December 31, ------------ 1998.................................................... $ 295 1999.................................................... 295 2000.................................................... 295 2001.................................................... 275 2002.................................................... 176 The leases contain escalation clauses for real estate taxes and other expenditures. Total rental expense was $305, $258 and $232 for the years ended December 31, 1997, 1996 and 1995, respectively. Legal Proceedings In the normal course of business, there are various outstanding legal proceedings. In the opinion of management, after consulting with legal counsel, the consolidated financial position and results of operations of the Bank will not be affected materially by the outcome of such proceedings. BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 (13) Regulatory Capital Requirements The Bank is subject to a capital based supervisory system that applies to all insured depository institutions. The category into which the Bank's capital ratios fall determines the degree of regulatory supervision to which the Bank could be subjected. Capital categories consist of "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized. " An institution is deemed to be "well capitalized" if (a) its risk based capital is 10% or greater, (b) its Tier 1 risk based capital ratio is 6% or greater and (c) its leverage ratio is 5% or greater. At December 31, 1997, the Bank is "well capitalized." When an insured institution's capital ratios fall below the "well capitalized" level, it becomes subject to a series of increasingly restrictive supervisory actions, to the point where a conservator or receiver must be designated for a "critically undercapitalized" institution unless certain conditions are made by the appropriate regulatory agencies. An institution is deemed to be "critically undercapitalized" if its ratio of Tier I capital to total assets is 2% or less. (14) Fair Value of Financial Instruments (In Thousands) The following is a summary of the carrying values and estimated fair values of the Bank's significant financial and non-financial instruments as of the dates indicated:
December 31, 1997 December 31, 1996 --------------------------- --------------------------- Carrying Estimated Carrying Estimated value fair value value fair value -------- --------- -------- --------- Financial assets: Cash and due from banks..................... $ 8,843 $ 8,843 $ 6,465 $ 6,465 Short-term investments...................... 11,670 11,670 19,870 19,870 Securities.................................. 186,802 186,958 162,473 162,548 Loans, net.................................. 483,949 486,192 468,357 466,666 Accrued interest receivable................. 5,240 5,240 5,106 5,106 Financial liabilities: Demand, NOW, savings and money market savings deposit accounts........... 226,218 226,218 222,236 222,236 Certificate of deposit accounts............. 256,086 255,226 261,780 262,023 Borrowed funds.............................. 69,265 68,848 60,565 60,583
SFAS No. 107 requires disclosures about fair values of financial instruments for which it is practicable to estimate fair value. Fair value is defined in SFAS No. 107 as the amount that a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. Quoted market prices are used to estimate fair values when those prices are available. However, active markets do not exist for many types of financial instruments. Consequently, fair values for these instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These instruments are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that may appropriately reflect market and credit risks. Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with SFAS No. 107 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect the possible tax ramifications or estimated transaction costs. BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 The following is a description of the principal valuation methods used by the Bank to estimate the fair values of its financial instruments: Securities The fair values of securities were based principally on market prices and dealer quotes. Certain fair values were estimated using pricing models or were based on comparisons to market prices of similar securities. The fair value of stock in the FHLB equals its carrying amount since such stock is only redeemable at its par value. Loans The fair value of performing loans, other than commercial participation loans, is estimated by discounting the contractual cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar quality. The fair value of commercial participation loans is considered to equal their carrying amounts since such loans generally are repayable within 90 days. For non-performing loans where the credit quality of the borrower has deteriorated significantly, fair values are estimated by discounting cash flows at a rate commensurate with the risk associated with those cash flows. Deposit Liabilities In accordance with SFAS No. 107, the fair values of deposit liabilities with no stated maturity (demand, NOW, savings and money market savings accounts) are equal to the carrying amounts payable on demand. The fair value of time deposits represents contractual cash flows discounted using interest rates currently offered on deposits with similar characteristics and remaining maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of alternative forms of funding ("deposit based intangibles"). Borrowed Funds The fair value of borrowings from the FHLB represent contractual repayments discounted using interest rates currently available for borrowings with similar characteristics and remaining maturities. Other Financial Assets and Liabilities Cash and due from banks, short-term investments and accrued interest receivable have fair values which approximate the respective carrying values because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk. Off-Balance Sheet Financial Instruments In the course of originating loans and extending credit, the Bank will charge fees in exchange for its commitment. While these commitment fees have value, the Bank has not estimated their value due to the short-term nature of the underlying commitments and their immateriality. BROOKLINE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 1997, 1996 and 1995 (15) Plan of Reorganization On October 8, 1997, the Board of Trustees of the Bank adopted a Plan of Reorganization ("the Plan") whereby the Bank will be reorganized from a state chartered mutual savings bank into a mutual holding structure, subject to approval by regulatory authorities and the Corporators of the Bank. As part of the Plan, the Bank will establish a state chartered mutual holding company ("MHC") and a capital stock holding company incorporated in Massachusetts ("the Company"). The Bank will become a state chartered capital stock bank wholly owned by the Company. The Company plans to offer for sale 47% of the shares of its common stock (the "Minority Ownership Interest") in a subscription offering initially to Bank depositors, employee benefit plans of the Bank and other certain eligible subscribers ("the Offering"). Any shares of common stock not sold in the Offering are expected to be sold to underwriters for resale to the public. After completion of the Offering, the MHC will be the 53% owner of the Company. As part of the Offering, the Bank will establish a liquidation account in an amount equal to the Minority Ownership Interest multiplied by the retained earnings of the Bank as of the date of the latest consolidated balance sheet appearing in the final prospectus. The liquidation account will be maintained for the benefit of eligible account holders and supplemental eligible account holders who maintain their accounts at the Bank after the Offering. The liquidation account will be reduced annually to the extent that such account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an account holder's interest in the liquidation account. In the event of a complete liquidation, each eligible account holder will be entitled to receive balances for accounts then held. Subsequent to the Offering, the Company and the Bank may not declare or pay dividends on and the Company may not repurchase any of its shares of common stock if the effect thereof would cause stockholders' equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration, payment or repurchase would otherwise violate regulatory requirements. Offering costs are being deferred and will reduce the proceeds from the shares sold in the Offering. If the Offering is not completed, all offering costs will be expensed. As of December 31, 1997, Offering costs of $464 have been incurred and are included in other assets. EX-27 3 FDS
5 U.S. DOLLARS 12-mos DEC-31-1997 JAN-01-1996 DEC-31-1997 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----