Item 1. Business
General
Brookline Bancorp, Inc. (the “Company”) is a bank holding company that
was organized in November 1997 for the purpose of acquiring all of the capital
stock of Brookline Savings Bank (“Brookline” or the “Bank”) upon completion of
the reorganization of Brookline from a mutual savings bank into a mutual
holding company structure. Brookline was established as a savings bank in 1871.
Brookline Bancorp, MHC (the “MHC”), a mutual holding company, owned 57.6% of
the Company’s shares of outstanding common stock at December 31, 2001.
In June 2000, the Company
commenced operations of Lighthouse Bank (“Lighthouse”) as New England’s
first-chartered internet-only bank. On July 17, 2001, Lighthouse was merged
into Brookline.
The Company, the MHC,
Brookline and Lighthouse converted from state to federal charters on July 16,
2001. As a result, each of these entities became subject to regulation by the
Office of Thrift Supervision (“OTS”).
For more information about
the Company’s corporate structure, its conversion to a federal charter and
Lighthouse, see pages 6 and 7 of the Company’s 2001 Annual Report to
Stockholders which is incorporated herein by reference.
Market Area and Credit Risk Concentration
Brookline operates five full-service banking offices in the Town of
Brookline, an urban/suburban community adjacent to the City of Boston, and a
full service banking office in the city of Newton, a community adjacent to the
Town of Brookline. The Newton office was opened on October 26, 2000.
Brookline’s deposits are gathered from the general public primarily in the Town
of Brookline and surrounding communities. Brookline’s lending activities are
concentrated primarily in the greater Boston metropolitan area and eastern
Massachusetts. The greater Boston metropolitan area benefits from the presence
of numerous institutions of higher learning, medical care and research centers
and the corporate headquarters of several significant mutual fund investment
companies. Eastern Massachusetts also has many high technology companies
employing personnel with specialized skills. These factors affect the demand
for residential homes, multi-family apartments, office buildings, shopping
centers, industrial warehouses and other commercial properties.
Brookline’s urban and suburban market area is characterized by a large
number of apartment buildings, condominiums and office buildings. As a result,
for many years, Brookline has emphasized multi-family and commercial real
estate mortgage lending. These types of loans typically generate higher yields,
but also involve greater credit risk than one-to four-family mortgage loans.
Many of Brookline’s borrowers have more than one multi-family or commercial
real estate loan outstanding with Brookline. Moreover, the loans are
concentrated in the market area described in the preceding paragraph.
Economic Conditions and Governmental Policies
The earnings and business of the Company are affected by external
influences such as general economic conditions and the policies of governmental
authorities, including the Federal Reserve Board. The Federal Reserve Board
regulates the supply of money and bank credit to influence general economic conditions
throughout the United States. The instruments of monetary policy employed by
the Federal Reserve Board affect interest rates earned on investment securities
and loans and interest rates paid on deposits and borrowed funds.
Repayment of loans made by the Company, in particular multi-family and
commercial real estate loans, generally is dependent on sufficient income from
the properties to cover operating expenses and debt service. Accordingly, the
asset quality of the Company’s loan portfolio is greatly affected by the
economy in the Company’s market area. During the past few years, the
Massachusetts economy has been strong and interest rates have declined or
remained at attractive levels. While these conditions, for the most part, have
had a favorable impact on property values and the business of the Company and
its borrowers, declining interest rates have prompted many borrowers to
refinance existing loans and seek new loans at lower interest rates fixed for
longer periods of time. Besides causing pressure on the Company’s interest rate
margin, the low interest rate environment has resulted in lower levels of
deposit growth as customers have found other investment instruments more
attractive. During the late 1980s and early 1990s, a regional recession and a
higher interest rate environment caused a significant decline in employment and
in real estate values, ultimately resulting in the failure of many financial
institutions in Massachusetts and New England.
Competition
The Company faces significant competition both in making loans and in
attracting deposits. The Boston metropolitan area has a high density of
financial institutions, many of which are branches of significantly larger
institutions which have greater financial resources than the Company, and all
of which are competitors of the Company to varying degrees. The Company’s
competition for loans comes principally from commercial banks, savings banks,
savings and loan associations, mortgage banking companies, credit unions,
insurance companies and other financial service companies. Its most direct
competition for deposits has historically come from commercial banks, savings
banks, savings and loan associations and credit unions. The Company faces
additional competition for deposits from non-depository competitors such as the
mutual fund industry, securities and brokerage firms and insurance companies.
Investment Securities
The investment policy of the Company is reviewed and approved by the
Board of Directors on an annual basis. The Company’s investment portfolio is
structured so as to provide asset diversification, interest and dividend
income, a source of liquidity to meet loan demand and potential deposit
outflows, and the opportunity to achieve capital appreciation through long-term
investment in equity securities.
The Company’s current policy generally favors investment in
mortgage-backed and mortgage-related securities, U.S. Government and Agency
securities, and corporate debt obligations. The policy allows the use of
interest rate swaps, options and futures, but only for purposes of hedging the
interest or credit risk of specific Company assets. While the Company has
seldom used hedging instruments, at December 31, 2001, it was a party to a $5.0
million interest-rate swap agreement that matures April 14, 2005. The Company
entered into the agreement to match more closely the repricing of certain
assets and liabilities and to reduce its exposure to increases in interest
rates.
Over the past three years, the Company expanded its acquisition of collateralized
mortgage obligations and mortgage-backed securities (“mortgage derivatives”).
Investments in such obligations increased from 2.7% of the total investment
portfolio at the beginning of 1999 to 45.4% of the total investment portfolio
at the end of 2001. Most of the Company’s purchases are securities issued by
U.S. government agencies and are part of the first tranche of mortgage pools.
Such tranches (or slices) have priority rights to cash flows, usually mature in
the three year range and are commonly classified as “PAC-1-1” securities.
It is the Company’s policy that the aggregate unamortized premiums on
all mortgage derivatives in the Company’s investment portfolio should not
exceed 1% of stockholders’ equity excluding net unrealized gains on securities
available for sale. No purchase of any mortgage derivative in excess of $3
million or involving payment of a premium of 2% or more can be made without the
prior approval of the chief executive officer of the Company. Purchases of all
mortgage derivatives not classified as PAC-1-1 securities or issued by other
than U.S. government agencies also require prior approval of the chief
executive officer.
The Company expects that mortgage derivatives will continue to
represent a significant portion of its investment portfolio since such
investments are “qualified thrift investments” for purposes of meeting the OTS
requirement that 65% of the Company’s assets be maintained in qualified thrift
assets.
The Company’s investment policy normally requires that corporate
obligations be rated “A” or better at the time of acquisition. In certain
instances, corporate obligations rated “BBB” can be purchased. At December 31,
2001, $3.5 million of the Company’s debt securities were rated lower than “A”.
Included in this amount was a $2.0 million bond issued by Southern California
Edison payable June 1, 2001 bearing interest at 6.50% per annum and carried on
the books of the Company at $1,440,000. This debt security was paid in full on
March 1, 2002. (For additional information, see page 10 of the Company’s 2001
Annual Report which is incorporated herein by reference).
At December 31, 2001, the Company’s marketable equity securities
portfolio totaled $17.2 million, including net unrealized gains of $7.7
million. Most of the portfolio was comprised of the stocks of national,
regional money center and community banks and utility companies. The Company’s
policy limits the aggregate carrying value of marketable equity securities to
no more than 25% of the Company’s stockholders’ equity, excluding net
unrealized gains on securities available for sale. The Company purchases
marketable equity securities as long-term investments that can provide the
opportunity for capital appreciation and dividend income that is taxed on a
more favorable basis than operating income. There can be no assurances that
investment in marketable equity securities will achieve appreciation in value
and, therefore, such investments involve higher risk.
The following table sets forth the composition of the Company’s debt
and equity securities portfolios at the dates indicated:
The following table sets
forth certain information regarding the amortized cost and market values of the
Company’s investment securities at the dates indicated:
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company’s
securities portfolio at the date indicated.
(1) The yields have been calculated on a tax
equivalent basis.
Loans
The Company’s loan portfolio consists primarily of first mortgage loans
secured by multi-family, commercial and one-to-four family residential real
estate properties located in the Company’s primary lending area. Another
component of the loan portfolio consists of participations in commercial loans
to national companies and organizations originated and serviced primarily by
money center banks. Generally, the participations mature between one day and
three months and are viewed by the Company as an alternative short-term
investment for liquidity management purposes rather than as traditional
commercial loans. The Company also provides financing for construction and
development projects, commercial lines of credit primarily to condominium
associations, home equity and second mortgage loans and other consumer loans.
The Company relies on community contacts as well as referrals from
existing customers, attorneys and other real estate professionals to generate
business within its lending area. In addition, existing borrowers are an
important source of business since many of its multi-family and commercial real
estate customers have more than one loan outstanding with the Company. Two
commissioned loan originators on the staff of the Company are also used to generate
residential mortgage loan business. The Company’s ability to originate loans
depends on the strength of the economy, trends in interest rates, customer
demands and competition.
Multi-family and commercial real estate mortgage lending are the Company’s
most significant areas of lending activities. At December 31, 2001 and 2000,
such loans represented 69.8% and 73.2%, respectively, of gross loans, exclusive
of money market loan participations. The Company intends to continue to
emphasize these types of loans depending on the demand for such loans and
trends in the real estate market and the economy.
The Company has written underwriting policies to control the inherent
risks in origination of loans. The policies address approval limits,
loan-to-value ratios, appraisal requirements, debt service coverage ratios,
loan concentration limits and other matters relevant to loan underwriting.
A number of factors are considered in originating multi-family and
commercial real estate mortgage loans. The qualifications and financial
condition of the borrower (including credit history), profitability and
expertise, as well as the value and condition of the underlying property, are
evaluated. When evaluating the qualifications of the borrower, the Company
considers the financial resources of the borrower, the borrower’s experience in
owning or managing similar property and the borrower’s payment history with the
Company and other financial institutions. Factors considered in evaluating the
underlying property include the net operating income of the mortgaged premises
before debt service and depreciation, the debt service coverage ratio (the
ratio of net operating income to debt service) and the ratio of the loan amount
to the appraised value.
Frequently, multi-family and commercial real estate mortgage loans are
made for five to ten year terms, with an amortization period of twenty to
twenty-five years, and are priced on an adjustable-rate basis with the
borrower’s option to fix the interest rate for the first few years. At the
borrower’s option, at the time of origination or later during the term, the
loan may be converted to a fixed rate, provided the fixed-rate period selected
by the borrower does not exceed the original term of the loan. Generally, a
yield maintenance fee and other fees are collected when a fixed-rate loan is
paid off prior to its maturity.
Since 1998, a stable and then declining interest rate environment
prompted many multi-family and commercial real estate borrowers to exercise
their options to convert loans from an adjustable-rate to a fixed-rate basis.
Additionally, many new loans originated since 1998 have been priced at
inception on a fixed-rate basis generally for periods ranging from two to seven
years. If interest rates increase during the fixed-rate phase of these loans,
the Company’s net interest income would be negatively affected. Occasionally,
the Company has partially funded loans originated on or converted to a
fixed-rate basis by borrowing funds from the FHLB on a fixed-rate basis for
periods that approximate the fixed-rate terms of the loans.
The Company offers both fixed-rate and adjustable-rate mortgage loans
secured by one-to-four family residences. Generally, fixed-rate residential
mortgage loans are not maintained in the Company’s loan portfolio.
At December 31, 2001,
construction and development loans amounted to $20.9 million, $4.9 million of
which had not been advanced as of that date. The $20.9 million is comprised of
$10.8 million pertaining to construction of multi-family properties, $3.2
million pertaining to construction of commercial properties, $3.5 million
pertaining to construction of one-to-four family residential homes, $2.9
million pertaining to construction of condominiums and $493,000 pertaining to
land loans. Different criteria are applied in underwriting construction loans
for which the primary source of repayment is the sale of the property than in
underwriting construction loans for which the primary source of repayment is
the stabilized cash flow from the completed project. For those loans where the
primary source of repayment is from resale of the property, in addition to the
normal credit analysis performed for other loans, Brookline also analyzes project
costs, the attractiveness of the property in relation to the market in which it
is located and demand within the market area. For those construction loans
where the source of repayment is the stabilized cash flow from the completed
project, Brookline analyzes not only project costs but also how long it might
take to achieve satisfactory occupancy and the reasonableness of projected
rental rates in relation to market rental rates.
Construction and development financing is generally considered to
involve a higher degree of risk than long-term financing on improved, occupied
real estate. Risk of loss on a construction loan is largely dependent upon the
accuracy of the initial estimate of construction costs, the estimated time to
sell or rent the completed property at an adequate price or rate of occupancy,
and market conditions. If the estimates and projections prove to be inaccurate,
the Company may be confronted with a project which, upon completion, has a
value that is insufficient to assure full loan repayment.
Commercial loans amounted to $42.6 million at December 31, 2001
compared to $33.2 million at December 31, 2000. At both dates, the portfolio
included a $10.0 million loan participation maturing on June 14, 2002 and loans
to condominium associations for the purpose of funding capital improvements.
Loans to condominium associations amounted to $23.5 million at December 31,
2001 and $15.8 million at December 31, 2000. Typically, such loans are made for
five to ten year terms and are secured by a general assignment of the revenue
of the condominium association. Among the factors considered in the
underwriting of such loans are the level of owner occupancy, the financial
condition and history of the condominium association, the attractiveness of the
property in relation to the market in which it is located and the
reasonableness of estimates of the cost of capital improvements to be made.
Depending on loan size, funds are advanced as capital improvements are made
and, in more complex situations, after completion of engineering inspections.
The following table sets forth the comparison of the Company’s loan
portfolio in dollar amounts and in percentages by type of loan at the dates
indicated.
Many of the Company’s borrowers have done business with the Company for
years and have more than one loan outstanding. It is the Company’s current
policy that the aggregate amount of loans outstanding to any one borrower or
related entities may not exceed 8.0% of Brookline’s stockholders’ equity
exclusive of unrealized gains or losses on securities available for sale, net
of income taxes (“core capital”). At December 31, 2001, Brookline’s core
capital amounted to $228.6 million and its largest borrower had aggregate loans
outstanding of $19.4 million, or 8.5% of core capital. The excess over the
aggregate limit was approved by the Executive Committee at the time of loan
origination. Including this borrower, there were 35 borrowers each with
aggregate loans outstanding of $5.0 million or greater at December 31, 2001. The
cumulative total of those loans was $258.2 million, or 31.2% of loans outstanding, exclusive of money
market loan participations. Most of this cumulative amount is comprised of
multi-family and commercial real estate mortgage loans.
The following table shows the contractual maturity and repricing dates
of the Company’s loan portfolio at December 31, 2001. The table does not
include prepayments or scheduled principal amortization.
(1) Amounts due are net of
unadvanced funds on loans.
The following table sets forth at December 31, 2001 the dollar amount
of gross loans contractually due or scheduled to reprice after one year and
whether such loans have fixed interest rates or adjustable interest rates.
Non-Performing Assets and Allowance for Loan Losses
For information about the Company’s non-performing assets and allowance
for loan losses, see pages 9 through 13 of the Company’s 2001 Annual Report to
Stockholders which is incorporated herein by reference.
Deposits
Historically, deposits have been the Company’s primary source of funds.
The Company offers a variety of deposit accounts with a range of interest rates
and terms. The Company’s deposit accounts consist of non-interest-bearing
checking accounts and interest-bearing NOW accounts, savings accounts and money
market savings accounts (referred to in the aggregate as “transaction deposit
accounts”) and certificate of deposit accounts. The Company offers individual retirement accounts (“IRAs”) and
other qualified plan accounts.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and the
relative attractiveness of competing deposit and investment alternatives. Brookline’s deposits are obtained
predominantly from customers in the Town of Brookline and surrounding
communities. Deposits are also gathered via the internet. The Company relies
primarily on competitive pricing of its deposit products, customer service and
long-standing relationships with customers to attract and retain deposits.
Market interest rates and rates offered by competing financial institutions
significantly affect the Company’s ability to attract and retain deposits. The
Company does not use brokers to obtain deposits.
The following table presents the deposit activity of the Company for
the years indicated.
Of the increase in deposits in 2000, $52.4 million was gathered by
Lighthouse from the time it commenced doing business with the public in the
last week of June 2000. Of that amount, approximately 20% was in
interest-bearing checking accounts, 25% in money market savings accounts and
55% in certificates of deposit. Brookline experienced an 8.5% rate of deposit
growth in 2000 as a result of expanded marketing efforts, the opening of a new
retail branch on October 26, 2000 and branch divestitures by other financial
institutions.
In 2001, a $67.3 million, or 22.5%, growth in transaction deposit
accounts was substantially offset by a $55.0 million, or 17.8%, decline in
certificates of deposit. The decline resulted primarily from significant
reductions in rates offered, especially during the second half of 2001.
The following table sets forth the distribution of the Company’s
average deposit accounts for the years indicated and the weighted average
interest rates on each category of deposits presented. Averages for the years
presented utilize average daily balances.
At December 31, 2001, the Company had outstanding $61.9 million in
certificate of deposit accounts of $100,000 or more, maturing as follows:
Borrowed Funds
The Company utilizes advances from the FHLB primarily in connection
with its management of the interest rate sensitivity of its assets and
liabilities. The advances are secured by all of the Company’s stock and
deposits in the FHLB and a general lien on one-to-four family mortgage loans,
certain multi-family loans and U.S. Government and Agency obligations in an
aggregate amount at least equal to outstanding advances. The maximum amount
that the FHLB will advance to member institutions, including the Company,
fluctuates from time to time in accordance with the policies of the FHLB. At
December 31, 2001, the Company had $178.1 million in outstanding advances from
the
FHLB and had the capacity to increase that amount to $311.7 million.
The Company expects to continue to utilize borrowings from the FHLB as part of
its management of the interest sensitivity of its assets and liabilities.
The following table sets forth certain information regarding borrowed
funds for the dates indicated:
Return on Equity and Assets
Return on equity and assets for the years presented is as follows:
Subsidiary Activities
Brookline is a wholly-owned subsidiary of the Company. Information as
to when it was established and its activities is included elsewhere in Part I
of this document.
Brookline Securities Corp. (“BSC”) is a wholly-owned subsidiary of the
Company and BBS Investment Corporation (“BBS”) is a wholly-owned subsidiary of Brookline.
These companies were established as Massachusetts security corporations for the
purpose of buying, selling and holding investment securities on their own
behalf and not as a broker. The income earned on their investment securities is
subject to a significantly lower rate of state tax than that assessed on income
earned on investment securities owned by the Company and Brookline. At December
31, 2001, BSC and BBS had total assets of $51.4 million and $111.3 million,
respectively, of which $50.7 million and $110.4 million, respectively, were in
investment securities and short-term investments.
160 Associates, Inc. (“Associates”) is a wholly-owned subsidiary of
Brookline established as a Massachusetts corporation primarily for the purpose
of acquiring and holding stock in a subsidiary engaged in business that
qualifies as a real estate investment trust. The amount of capital Associates
invested in such activity amounted to $265.9 million at December 31, 2001.
Brookline Preferred Capital Corporation (“BPCC”) is a 99.9% owned
subsidiary of Associates established as a Massachusetts corporation to engage
in real estate business activities (including the acquisition and holding of
securities and mortgage loans) that
enable it to be taxed as a real estate investment trust for federal and
Massachusetts tax purposes. At December 31, 2001, BPCC had total assets of
$266.6 million, $226.1 million of which were mortgage loans originated by and
acquired from Brookline.
Personnel
As of December 31, 2001, the Company had 108 full-time employees and 11
part-time employees. The employees are not represented by a collective
bargaining unit and the Company considers its relationship with its employees
to be good.
Supervision and Regulation
General
The Bank is examined and
supervised by the OTS and the FDIC. This regulation and supervision establishes
a comprehensive framework of activities in which an institution can engage and
is intended primarily for the protection of the deposit insurance fund and
depositors. The Bank also is a member of and owns stock in the Federal Home
Loan Bank of Boston, which is one of the twelve regional banks in the Federal
Home Loan Bank System.
Any change in the laws or
regulations, whether by the FDIC, OTS or Congress, could have a material
adverse impact on the Company and the Bank and their operations.
Federal Banking Regulation
Business
Activities. A federal savings association
derives its lending and investment powers from the Home Owners’ Loan Act, as
amended, and the regulations of the OTS. Under these laws and regulations, the
Bank may invest in mortgage loans secured by residential and commercial real
estate, commercial and consumer loans, certain types of debt securities and
certain other assets. The Bank also may establish subsidiaries that may engage
in activities not otherwise permissible for the Bank, including certain real
estate equity investments and securities and insurance brokerage. The Bank’s
authority to invest in certain types of loans or other investments is limited
by federal law.
Loans to
One Borrower. A federal savings association
generally may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of unimpaired capital and surplus on an unsecured
basis. An additional amount may be lent, equal to 10% of unimpaired capital and
surplus, if the loan is secured by readily marketable collateral, but generally
does not include real estate. As of December 31, 2001, the Bank was in
compliance with the loans-to-one-borrower limitations.
Qualified
Thrift Lender Test.
As a federal savings association, the Bank is required to satisfy a
qualified thrift lender, or “QTL,” test.
Under the QTL test, the Bank must maintain at least 65% of its
“portfolio assets” in “qualified thrift investments” in at least nine of the
most recent 12 month period. “Portfolio assets” generally means total assets
less the sum of specified liquid assets up to 20% of total assets, goodwill and
other intangible assets and the value of property used in the conduct of its
business.
“Qualified thrift
investments” includes various types of loans made for residential and housing
purposes, investments related to such purposes, including certain
mortgage-backed and related securities, and loans for personal, family,
household and certain other purposes up to a limit of 20% of portfolio assets.
Recent legislation broadened the scope of “qualified thrift investments” to
include 100% of an institution’s credit card loans, education loans and small
business loans. The Bank also may satisfy the QTL test by qualifying as a
“domestic building and loan association” as defined in the Internal Revenue
Code of 1986.
A savings association that
fails the qualified thrift lender test must either convert to a bank charter or
operate under specified restrictions. The OTS has granted the Bank an exception
from the qualified thrift lender test through July 17, 2002. At December 31,
2001, the Bank maintained approximately 64.9% of its portfolio assets in
qualified thrift investments.
Capital Distributions. OTS regulations govern capital distributions by a
federal savings association, which include cash dividends, stock repurchases
and other transactions charged to the capital account. A savings association
must file an application for approval of a capital distribution if:
• the
total capital distributions for the applicable calendar year exceed the sum of
the association’s net income for that year to date plus the association’s
retained net income for the preceding two years;
• the
association would not be at least adequately capitalized following the
distribution;
• the
distribution would violate any applicable statute, regulation, agreement or
OTS-imposed condition; or
• the
association is not eligible for expedited treatment of its filings.
Even
if an application is not otherwise required, every savings association that is
a subsidiary of a holding company must still file a notice with the OTS at
least 30 days before the board of directors declares a dividend or approves a
capital distribution.
The OTS may disapprove a
notice or application if:
• the
association would be undercapitalized following the distribution;
• the
proposed capital distribution raises safety and soundness concerns; or
• the
capital distribution would violate a prohibition contained in any statute,
regulation or agreement.
Liquidity. A
federal savings association is required to maintain a sufficient amount of
liquid assets to ensure its safe and sound operation.
Community Reinvestment Act and Fair Lending Laws. All savings associations have a responsibility
under the Community Reinvestment Act and related regulations of the OTS to help
meet the credit needs of their communities, including low- and moderate-income
neighborhoods. In connection with its examination of a federal savings
association, the OTS is required to assess the association’s record of
compliance with the Community Reinvestment Act. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating
in their lending practices on the basis of characteristics specified in those
statutes. An association’s failure to comply with the provisions of the Community
Reinvestment Act could, at a minimum, result in regulatory restrictions on its
activities. The failure to comply with the Equal Credit Opportunity Act and the
Fair Housing Act could result in enforcement actions by the OTS, as well as
other federal regulatory agencies and the Department of Justice. The Bank
received a satisfactory Community Reinvestment Act rating in its most recent
examinations, which were conducted by the Massachusetts division of Banks and
the FDIC.
Transactions with Related Parties. A federal saving association’s authority to engage
in transactions with its “affiliates” is limited by OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act (the “FRA”). The term
“affiliates” for these purposes generally means any company that controls or is
under common control with an institution. The Company and its non-savings
institution subsidiaries are affiliates of the Bank. In general, transactions
with affiliates must be on terms that are as favorable to the association as comparable
transactions with non-affiliates. In
addition, certain types of these transactions are restricted to an aggregate
percentage of the association’s capital.
Collateral in specified amounts must usually be provided by affiliates
in order to receive loans from the association. In addition, OTS regulations prohibit a savings association from
lending to any of its affiliates that are engaged in activities that are not
permissible for bank holding companies and from purchasing the securities of
any affiliate, other than a subsidiary.
The Bank’s authority to
extend credit to its directors, executive officers and 10% shareholders, as
well as to entities controlled by such persons, is currently governed by the
requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the
Federal Reserve Board. Among other things, these provisions require that
extensions of credit to insiders
(i) be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features, and
(ii) not exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based, in part, on
the amount of the Bank’s capital. In addition, extensions of credit in excess
of certain limits must be approved by the Bank’s board of directors.
Enforcement.
The OTS has primary enforcement responsibility over federal savings
institutions and has the authority to bring enforcement action against all
“institution-related parties,” including stockholders, and attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors of the institutions,
receivership, conservatorship or the termination of deposit insurance. Civil
penalties cover a wide range of violations and actions, and range up to $25,000
per day, unless a finding of reckless disregard is made, in which case
penalties may be as high as $1 million per day. The FDIC also has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take action under specified circumstances.
Standards
for Safety and Soundness. Federal law requires each
federal banking agency to prescribe for all insured depository institutions
standards relating to, among other things, internal controls, information
systems and audit systems, loan documentation, credit underwriting, interest
rate risk exposure, asset growth, compensation, and other operational and
managerial standards as the agency deems appropriate. The federal banking
agencies adopted Interagency Guidelines Prescribing Standards for Safety and
Soundness to implement the safety and soundness standards required under
federal law. The guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The guidelines address
internal controls and information systems, internal audit systems, credit
underwriting, loan documentation, interest rate risk exposure, asset growth,
and compensation, fees and benefits. If
the appropriate federal banking agency determines that an institution fails to
meet any standard prescribed by the guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan.
Capital
Requirements. OTS regulations require savings
associations to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for associations receiving the highest rating on
the CAMELS rating system) and an 8% risk-based capital ratio.
The prompt corrective action
standards discussed below, in effect, establish a minimum 2% tangible capital
standard.
The risk-based capital
standard for savings associations requires the maintenance of Tier 1 (core) and
total capital (which is defined as core capital and supplementary capital) to
risk-weighted assets of at least 4% and 8%, respectively. In determining the
amount of risk-weighted assets, all assets, including certain off-balance sheet
assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the
OTS capital regulation based on the risks believed inherent in the type of
asset. Core capital is defined as common stockholders’ equity (including
retained earnings), certain noncumulative perpetual preferred stock and related
surplus and minority interests in equity accounts of consolidated subsidiaries
less intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45% of net unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of core capital.
At December 31, 2001, the
Bank’s capital exceeded all applicable requirements.
Prompt
Corrective Action Regulations. Under the prompt
corrective action regulations, the OTS is required and authorized to take
supervisory actions against undercapitalized savings associations. For this
purpose, a savings association is placed in one of the following five
categories based on the association’s capital:
• well capitalized (at least
5% leverage capital, 6% tier 1 risk-based capital and 10% total risk-based
capital);
• adequately capitalized (at
least 4% leverage capital, 4% tier 1 risk-based capital and 8% total risk-based
capital);
• undercapitalized (less than
8% total risk-based capital, 4% tier 1 risk-based capital or 3% leverage
capital);
• significantly
undercapitalized (less than 6% total risk-based capital, 3% tier 1 risk-based
capital or 3% leverage capital); and
• critically undercapitalized
(less than 2% tangible capital).
Generally, the banking
regulator is required to appoint a receiver or conservator for an association
that is “critically undercapitalized”. The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date
an association receives notice that it is “undercapitalized”, “significantly
undercapitalized” or “critically undercapitalized”. In addition, numerous
mandatory supervisory actions become immediately applicable to the association,
including, but not limited to, restrictions on growth, investment activities,
capital distributions and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions against undercapitalized
associations, including the issuance of a capital directive and the replacement
of senior executive officers and directors.
At December 31, 2001, the Bank met
the criteria for being considered “well-capitalized”.
Insurance
of Deposit Accounts. Deposit accounts in the Bank are
insured by the Bank Insurance Fund (the “BIF”) of the FDIC, generally up to a
maximum of $100,000 per separately insured depositor. The Bank’s deposits are
therefore subject to FDIC deposit insurance assessments. The FDIC has adopted a
risk-based system for determining deposit insurance assessments. The FDIC is
authorized to raise the assessment rates as necessary to maintain the required
ratio of reserves to insured deposits of 1.25%. In addition, all FDIC-insured
institutions must pay assessments to the FDIC at an annual rate of
approximately 0.0212% of insured deposits to fund interest payments on bonds
maturing in 2017 issued by a federal agency to recapitalize the predecessor to
the Savings Association Insurance Fund.
Prohibitions
Against Tying Arrangements. Federal savings
associations are subject to certain prohibitions on “tying arrangements.” A
depository institution is prohibited, subject to some exceptions, from
extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that
the customer obtain some additional service from the institution or its
affiliates or not obtain services of a competitor of the institution.
Federal
Home Loan Bank System. The Bank is a member of the
Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan
Banks. The Federal Home Loan Bank System provides a central credit facility
primarily for member institutions. As a member of the Federal Home Loan Bank of
Boston, the Bank is required to acquire and hold shares of capital stock in
that Federal Home Loan Bank in an amount at least equal to 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its borrowings from the
Federal Home Loan Bank, whichever is greater. As of December 31, 2001, the Bank
was in compliance with this requirement.
Federal Reserve System
The Federal Reserve Board
regulations require savings associations to maintain non-interest-earning
reserves against their transaction accounts, such as negotiable order of
withdrawal and regular checking accounts. At December 31, 2001, the Bank was in
compliance with these reserve requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to
satisfy liquidity requirements imposed by the OTS.
Holding Company Regulation
General.
The Company is a mutual savings and loan holding company within the meaning of
the Home Owners’ Loan Act. As such, the Company is registered with the OTS and
is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and any non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings association. As a
federal corporation, the Company is generally not subject to state business
organizations law.
Permitted
Activities. Pursuant to Section 10(o) of the Home Owners’ Loan Act
and OTS regulations and policy, a federally chartered mid-tier holding company
such as the Company may engage in certain defined activities, including:
• investing in the stock of a
savings association;
• acquiring a mutual
association through the merger of such association into a savings association
subsidiary of such holding company or an interim savings association subsidiary
of such holding company;
• merging with or acquiring
another holding company, one of whose subsidiaries is a savings association;
• investing
in a corporation, the capital stock of which is available for purchase by a
savings association under federal law or under the law of any state where the
subsidiary savings association or associations share their home offices;
• furnishing or performing
management services for a savings association subsidiary of such company;
• holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
• holding or managing
properties used or occupied by a savings association subsidiary of such
company;
• any other activity (i) that
the Federal Reserve Board, by regulation, has determined to be permissible for
bank holding companies under Section 4(c) of the Bank Holding Company Act of
1956, as amended (“Bank Holding Company Act”), unless the Director of the OTS,
by regulation, prohibits or limits any such activity for savings and loan
holding companies; or (ii) in which multiple savings and loan holding companies
were authorized (by regulation) to directly engage on March 5, 1987;
• purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if
the purchase of such stock by such savings and loan holding company is approved
by the Director; and
• any activity permissible for
financial holding companies under section 4(k) of the Bank Holding Company Act.
Permissible activities that
are deemed to be financial in nature or incidental thereto under section 4(k)
of the Bank Holding Company Act include:
• lending, exchanging,
transferring, investing for others or safeguarding money or securities;
• insurance activities or
providing and issuing annuities, and acting as principal, agent or broker;
• financial, investment or
economic advisory services;
• issuing or selling
instruments representing interests in pools of assets that a bank is permitted
to hold directly;
• underwriting, dealing in, or
making a market in securities;
• activities previously
determined by the Federal Reserve Board to be closely related to banking;
• activities that bank holding
companies are permitted to engage in outside of the U.S.;
• merchant banking activities;
and
• portfolio investments made
by an insurance company.
The Home Owners’ Loan Act prohibits
a savings and loan holding company, including the Company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain
exceptions, more than 5% of a nonsubsidiary savings institution, a
nonsubsidiary holding company, or a nonsubsidiary company engaged in activities
other than those permitted by the Home Owners’ Loan Act; or acquiring or retaining
control of an institution that is not federally insured.
The
OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies; and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions.
Waivers of Dividends by Brookline Bancorp, MHC.
OTS regulations require Brookline Bancorp, MHC to notify the OTS of any
proposed waiver of its right to receive dividends. The OTS reviews dividend
waiver notices on a case-by-case basis and, in general, does not object to any
such waiver if (i) the mutual holding company’s board of directors
determines
that such waiver is consistent with such directors’ fiduciary duties to the
mutual holding company’s members, (ii) for as long as the savings association
subsidiary is controlled by the mutual holding company, the dollar amount of
dividends waived by the mutual holding company are considered as a restriction
to the retained earnings of the savings association, which restriction, if
material, is disclosed in the public financial statements of the savings
association as a note to the financial statements, (iii) the amount of any
dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company and, in accordance with SFAS 5,
where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is
recorded as a liability, and (iv) the amount of any waived dividend is
considered as having been paid by the savings association in evaluating any
proposed dividend under OTS capital distribution regulations.
Conversion of Brookline Bancorp, MHC to Stock Form.
OTS regulations permit Brookline Bancorp, MHC to convert from the mutual form
of organization to the capital stock form of organization (a “Conversion
Transaction”). In a Conversion Transaction, a new holding company would be
formed as the successor to the Company (the “New Holding Company”), Brookline
Bancorp, MHC’s corporate existence would end, and certain depositors of the
Bank would receive the right to subscribe for additional shares of the New
Holding Company. In a Conversion Transaction, each share of common stock held
by stockholders other than Brookline Bancorp, MHC (“Minority Stockholders”)
would be automatically converted into a number of shares of common stock of the
New Holding Company determined pursuant to an exchange ratio that ensures that
after the Conversion Transaction the percentage of the to-be-outstanding shares
of the New Holding Company issued to Minority Stockholders in exchange for
their common stock would be equal to the percentage of the outstanding shares
of common stock held by Minority Stockholders immediately prior to the
Conversion Transaction. Under OTS regulations, in any Conversion Transaction of
Brookline Bancorp, MHC, waived dividends would not be considered in determining
an appropriate exchange ratio and therefore public stockholders would not be
diluted because of dividends previously waived by Brookline Bancorp, MHC.
Federal Securities Laws.
The Company’s common stock is registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934. The Company is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act of 1934.
Federal and State Taxation
Federal Taxation
General. The Mutual Company, the
Company and the Bank are subject to federal income taxation in the same general
manner as other corporations, with some exceptions discussed below. The
following discussion of federal taxation is intended only to summarize certain
pertinent federal income tax matters and is not a comprehensive description of
the tax rules applicable to the Bank.
Method of Accounting.
For federal income tax purposes, the Company reports its income and expenses on
the accrual method of accounting and uses a fiscal year ending December 31 for
filing its consolidated federal income tax returns.
Taxable Distributions and Recapture.
Bad debt reserves created prior to November 1, 1988 are subject to recapture
into taxable income should the Bank make certain non-dividend distributions or
cease to maintain a bank charter. At December 31, 2001, the Bank’s total
federal pre-1988 reserve was $1.8 million. This reserve reflects the cumulative
effects of federal tax deductions by the Bank for which no federal income tax
provision has been made.
Minimum Tax. The Code imposes an
alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable
income plus certain tax preferences (“alternative minimum taxable income” or
“AMTI”). The AMT is payable to the extent such AMTI is in excess of an
exemption amount. In general, net operating losses can offset no more than 90%
of AMTI. Special provisions apply to losses generated in 2001 and 2002. Certain
payments of alternative minimum tax may be used as credits against regular tax
liabilities in future years. The Bank has not been subject to the alternative
minimum tax and has no such amounts available as credits for carryover.
Net Operating Loss Carryovers. A
financial institution may carry back net operating losses to the preceding two
taxable years and forward to the succeeding 20 taxable years. Recently enacted
legislation allows net operating losses
incurred
in 2001 and 2002 to be carried back five years. At December 31, 2001, the Bank
had no net operating loss carry forwards for federal income tax purposes.
Corporate Dividends-Received Deduction.
The Company may exclude from its income 100% of dividends received from the
Bank as a member of the same affiliated group of corporations. The Mutual
Company owns 57.6% of the outstanding Common Stock of the Company. As such, the
Mutual Company is not permitted to file a consolidated federal income tax
return with the Company and the Bank. Corporations that own less than 80% but
more than 20% of the stock of a corporation distributing a dividend may deduct
from taxable income 80% of dividends received or accrued on their behalf.
State Taxation
Massachusetts
State Taxation. For Massachusetts income tax
purposes, a consolidated tax return cannot be filed. Instead, the Company, the Bank and each of their subsidiaries
file separate annual income tax returns. The Company and the Bank are subject
to an annual Massachusetts excise tax at a rate of 10.50% of their net income.
BBS Investment Corporation, the Bank’s other wholly-owned subsidiary, and
Brookline Securities Corp., the Company’s wholly-owned subsidiary, are
securities corporations and, accordingly, are subject to an excise tax at the
rate of 1.32% of their gross income. For these purposes, Massachusetts net income
is defined as gross income from all sources without any exclusions, less the
following deductions: all deductions (but not credits) which are allowable
under the Code except for those deductions under the Code relating to (1)
dividends received, (2) losses sustained in other taxable years and (3) taxes
on or measured by income, franchise taxes for the privilege of doing business
and capital stock taxes imposed by any state of the United States, the District
of Columbia, the Commonwealth of Puerto Rico, any territory or possession of
the United States or any foreign country, or a political subdivision of any of
the foregoing. The Company and the Bank are not permitted to carry their losses
forward or back for Massachusetts tax purposes.
In January 1997, the Bank
incorporated Brookline Preferred Capital Corporation (“BPCC”) which elected to
be taxed as a real estate investment trust (“REIT”). BPCC is 99.9% owned by 160
Associates, Inc. ("Associates"), a wholly-owned subsidiary of the
Bank. Shareholders of a REIT that are subject to the Massachusetts corporate
excise tax are entitled to a 95% dividends-received deduction. Accordingly,
Associates pays Massachusetts income tax on only 5% of the dividends it
receives from the REIT.
Item 2.
Item 2. Properties
The branch located in Brookline’s main office
is owned by the Company. The other five branches and operations center of
Brookline and space in Waltham, Massachusetts used as a call center are leased
from unrelated third parties. The operations center is used primarily to house
operations and support services. At December 31, 2001, the net book value of
premises and leasehold improvements was $814,000. Refer to Note 13 of the Notes
to Consolidated Financial Statements on page 47 of the Company’s Annual Report
to Stockholders for information regarding the Company’s lease commitments at
December 31, 2001.
Item 3.
Item 3. Legal
Proceedings
The Company is not involved in any pending
legal proceedings other than routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, involve amounts which are
believed by management to be immaterial to the financial condition and results
of operations of the Company.
Item 4.
Item 4. Submission Of Matters To A Vote Of Security
Holders
None
PART II
Item 5.
Item 5. Market For The Registrant’s Common Stock And
Related Security Holder Matters
The common stock of the Company is traded on
the Nasdaq National Market System. The approximate number of holders of common
stock as of December 31, 2001, as well as a table setting forth cash dividends
paid on common stock and the high and low closing prices of the common stock
for each of the quarters in the year ended December 31, 2001, appears on Page
59 of the Company’s 2001 Annual Report to Stockholders which is incorporated
herein by reference.
Item 6.
Item 6. Selected
Consolidated Financial Data
Selected Consolidated Financial Data of the
Company appears on page 1 and the back of the cover page of the Company’s 2001
Annual Report to Stockholders which is incorporated herein by reference.
Item 7.
Item 7. Management’s Discussion And Analysis Of
Financial Condition And Results Of Operations
Management’s Discussion and Analysis of
Financial Condition and Results of Operations appears on pages 6 through 22 of
the Company’s 2001 Annual Report to Stockholders which is incorporated herein
by reference.
Item 7a.
Item 7a. Quantitative
And Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures
About Market Risk appears on pages 17 through 19 of the Company’s 2001 Annual
Report to Stockholders which is incorporated herein by reference.
Item 8.
Item 8. Financial
Statements And Supplementary Data
The following financial statements and
supplementary data appear on the pages indicated of the Company’s 2001 Annual
Report to Stockholders which is incorporated herein by reference:
Pages
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income for the years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Stockholders’ Equity for the
years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December
31, 2001, 2000 and 1999
28-29
Notes to Consolidated Financial Statements
30-57
Item 9.
Item 9. Changes In And Disagreements With
Accountants On Accounting And Financial Disclosures
None.
PART III
Item 10.
Item 10. Directors And Executive Officers Of The Registrant
A
listing of and information about the Company’s Directors and Executive Officers
appears on pages 3 through 5 of the Company’s proxy statement dated March 14,
2002 which is incorporated herein by reference.
Item 11.
Item 11.
Executive Compensation
Executive
Compensation is presented on page 9 of the Company’s proxy statement dated
March 14, 2002 which is incorporated herein by reference.
Item 12.
Item 12.
Security Ownership Of Certain Beneficial Owners And Management
Security
Ownership of Certain Beneficial Owners and Management is presented on pages 2
and 3 of the Company’s proxy statement dated March 14, 2002 which is
incorporated herein by reference.
Item 13.
Item 13. Certain Relationships And Related Transactions
Certain
Relationships and Related Transactions are presented on page 13 of the
Company’s proxy statement dated March 14, 2002 which is incorporated herein by
reference.
PART IV
Item 14.
Item 14. Exhibits, Financial
Statement Schedules And Reports On Form 8-K
(a) Documents
(1) Financial Statements: All
financial statements are included in Item 8 of Part II of this Report.
(2) Financial Statement Schedules:
All financial statement schedules have been omitted because they are not
required, not applicable or are included in the consolidated financial
statements or related notes.
(3) Exhibits: The exhibits listed
below are filed herewith or incorporated herein by reference to other filings.
EXHIBIT INDEX
Exhibit
Description
3(i)
Federal Charter of
Brookline Bancorp, Inc. (Exhibit 3(i) to Form-10-Q filed on August 10,
2001)**
3(ii)
Federal Bylaws of
Brookline Bancorp, Inc. (Exhibit 3(ii) to Form-10-Q filed on August 10,
2001)**
3.1
Articles of Organization
of the Company (Exhibit 3(i) to Form-10-Q filed on August 10, 2001)**
3.2
Bylaws of the Company
(Exhibit 3(ii) to Form-10-Q filed on August 10, 2001)**
Form of Common Stock
Certificate of the Company (Exhibit 4 to Form-10-Q filed on August 10,
2001)**
10.1
Form of Employment
Agreement (Exhibit 10.1 to Form S-1 filed on November 18, 1997)**
10.2
Form of Severance
Agreement (Exhibit 10.2 to Form S-1 filed on November 18, 1997)**
10.3
Supplemental Retirement
Income Agreement with Richard P. Chapman, Jr. (Exhibit 10.3 to Form S-1 filed
on November 18, 1997)**
10.4
Supplemental Retirement
Income Agreement with Susan M. Ginns (Exhibit 10.4 to Form S-1 filed on
November 18, 1997)**
10.5
Supplemental Retirement
Income Agreement with Charles H. Peck (Exhibit 10.5 to Form S-1 filed on
November 18, 1997)**
10.6
Amended Employee Stock
Ownership Plan (Exhibit 10.6 to Form 10-K filed on March 23, 2000 and Exhibit
10.6 to Form 10-Q filed on November 14, 2000)**
10.6
Sixth and Seven Amendment
to Employee Stock Ownership Plan
Statement Regarding
Computation of Per Share Earnings - Incorporated herein by reference (See
note 15 of the Notes to Consolidated Financial Statements on page 49 of the
Company’s 2001 Annual Report to Stockholders).
2001 Annual Report to
Stockholders
Subsidiaries of the
Registrant - This information is presented in Part I, Item 1. Business - Subsidiary Activities of this
Report.
Consent of Independent
Certified Public Accounts
** Filed as part
of a previous Commission filing and incorporated herein by reference.
(b) Reports on
Form 8-K - No reports on Form 8-K were filed by the Company during the year
ended December 31, 2001
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.
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.