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Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

Commission file number 0-23695

 

Brookline Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

04-3402944

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

160 Washington Street, Brookline, MA

 

02447-0469

(Address of principal executive offices)

 

(Zip Code)

 

(617) 730-3500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x  NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o  NO x

 

As of May 9, 2012, the number of shares of common stock, par value $0.01 per share, outstanding was 70,040,980.

 

 

 



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

FORM 10-Q

 

Index

 

 

 

 

 

Page

Part I

 

Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 (Unaudited)

 

1

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

46

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

68

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

71

 

 

 

 

 

Part II

 

Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

72

 

 

 

 

 

Item 1A.

 

Risk Factors

 

72

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

72

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

72

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

72

 

 

 

 

 

Item 5.

 

Other Information

 

72

 

 

 

 

 

Item 6.

 

Exhibits

 

73

 

 

 

 

 

 

 

Signatures

 

74

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

(In Thousands)

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

88,884

 

$

56,513

 

Short-term investments

 

44,382

 

49,783

 

Total cash and cash equivalents

 

133,266

 

106,296

 

Investment securities (note 4):

 

 

 

 

 

Available-for-sale (amortized cost of $458,518 and $214,555, respectively)

 

461,498

 

217,431

 

Restricted equity securities (note 5)

 

53,554

 

39,283

 

Other securities

 

500

 

 

Total securities

 

515,552

 

256,714

 

Loans and leases (note 6)

 

3,935,518

 

2,720,821

 

Allowance for loan and lease losses (note 7)

 

(34,428

)

(31,703

)

Net loans and leases

 

3,901,090

 

2,689,118

 

Premises and equipment, net of accumulated depreciation and amortization of $20,365 and $19,726, respectively

 

48,908

 

38,495

 

Building held for sale (amortized cost of $6,192)

 

6,046

 

 

Deferred tax asset

 

24,647

 

12,681

 

Goodwill, net (note 3)

 

138,914

 

45,799

 

Identified intangible assets, net of accumulated amortization of $13,934 and $12,651, respectively (note 3)

 

25,849

 

5,214

 

Other real estate owned and repossessed assets, net

 

2,647

 

1,266

 

Monies in escrow — Bancorp Rhode Island, Inc. acquisition

 

 

112,983

 

Other assets

 

80,205

 

30,447

 

Total assets

 

$

4,877,124

 

$

3,299,013

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Deposits:

 

 

 

 

 

Demand checking accounts

 

$

529,945

 

$

225,284

 

NOW accounts

 

181,299

 

110,220

 

Savings accounts

 

511,736

 

164,744

 

Money market savings accounts

 

1,174,805

 

946,411

 

Certificate of deposit accounts

 

1,061,548

 

805,672

 

Total deposits

 

3,459,333

 

2,252,331

 

Borrowed funds (note 8):

 

 

 

 

 

Advances from the FHLB

 

698,671

 

498,570

 

Other borrowings

 

59,865

 

8,349

 

Total borrowed funds

 

758,536

 

506,919

 

Mortgagors’ escrow accounts

 

7,156

 

6,513

 

Accrued expenses and other liabilities

 

50,883

 

26,248

 

Total liabilities

 

4,275,908

 

2,792,011

 

 

 

 

 

 

 

Commitments and contingencies (note 10)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Brookline Bancorp, Inc. stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value; 50,000,000 shares authorized; none issued

 

 

 

Common stock, $0.01 par value; 200,000,000 shares authorized; 75,414,713 shares and 64,411,889 shares issued, respectively

 

754

 

644

 

Additional paid-in capital

 

618,031

 

525,171

 

Retained earnings, partially restricted

 

40,398

 

39,993

 

Accumulated other comprehensive income

 

2,457

 

1,963

 

Treasury stock, at cost; 5,373,733 shares

 

(62,107

)

(62,107

)

Unallocated common stock held by ESOP; 367,137 shares and 378,215 shares, respectively

 

(2,002

)

(2,062

)

Total Brookline Bancorp, Inc. stockholders’ equity

 

597,531

 

503,602

 

Noncontrolling interest in subsidiary

 

3,685

 

3,400

 

Total equity

 

601,216

 

507,002

 

Total liabilities and equity

 

$

4,877,124

 

$

3,299,013

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

1



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

(In Thousands Except Share Data)

 

Interest and dividend income:

 

 

 

 

 

Loans and leases

 

$

49,643

 

$

31,625

 

Debt securities

 

3,229

 

1,757

 

Short-term investments

 

27

 

24

 

Marketable and restricted equity securities

 

92

 

37

 

Total interest and dividend income

 

52,991

 

33,443

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

Deposits

 

5,517

 

4,895

 

Borrowed funds and subordinated debt

 

3,840

 

2,608

 

Total interest expense

 

9,357

 

7,503

 

 

 

 

 

 

 

Net interest income

 

43,634

 

25,940

 

Provision for credit losses (note 7)

 

3,247

 

1,059

 

Net interest income after provision for credit losses

 

40,387

 

24,881

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

Fees, charges and other income

 

3,733

 

1,046

 

Loss from investments in affordable housing projects

 

(138

)

 

Gain on sales of securities (note 4)

 

 

80

 

Total non-interest income

 

3,595

 

1,126

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

Compensation and employee benefits

 

14,688

 

6,811

 

Occupancy

 

2,676

 

1,374

 

Equipment and data processing

 

3,645

 

2,075

 

Professional services

 

6,453

 

789

 

FDIC insurance

 

630

 

434

 

Advertising and marketing

 

703

 

393

 

Amortization of identified intangible assets (note 3)

 

1,283

 

296

 

Other

 

2,514

 

1,277

 

Total non-interest expense

 

32,592

 

13,449

 

 

 

 

 

 

 

Income before income taxes

 

11,390

 

12,558

 

Provision for income taxes

 

4,756

 

5,008

 

Net income

 

6,634

 

7,550

 

 

 

 

 

 

 

Less net income attributable to noncontrolling interest in subsidiary

 

285

 

283

 

Net income attributable to Brookline Bancorp, Inc.

 

$

6,349

 

$

7,267

 

 

 

 

 

 

 

Earnings per common share (note 11):

 

 

 

 

 

Basic

 

$

0.09

 

$

0.12

 

Diluted

 

$

0.09

 

0.12

 

 

 

 

 

 

 

Weighted average common shares outstanding during the period:

 

 

 

 

 

Basic

 

69,664,619

 

58,611,488

 

Diluted

 

69,665,873

 

58,618,309

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.085

 

$

0.085

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

2



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

(In Thousands)

 

 

 

 

 

 

 

Net income

 

$

6,634

 

$

7,550

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

Unrealized securities holding gains (losses) excluding non-credit gain on impairment of securities

 

762

 

(431

)

Non-credit gain on impairment of securities

 

2

 

2

 

Net unrealized securities holding gains (losses) before income taxes

 

764

 

(429

)

Income tax expense (benefit)

 

269

 

(142

)

Net unrealized securities holding gains (losses)

 

495

 

(287

)

 

 

 

 

 

 

Adjustment of accumulated obligation for postretirement benefits

 

(5

)

(5

)

Income tax benefit

 

4

 

2

 

Net adjustment of accumulated obligation for postretirement benefits

 

(1

)

(3

)

 

 

 

 

 

 

Net unrealized holding gains (losses)

 

494

 

(290

)

 

 

 

 

 

 

Less reclassification adjustment for securities gains (losses) included in net income:

 

 

 

 

 

Gain on sales of securities

 

 

80

 

Income tax expense

 

 

(29

)

Net securities gains included in net income

 

 

51

 

 

 

 

 

 

 

Net other comprehensive income (loss)

 

494

 

(341

)

 

 

 

 

 

 

Comprehensive income

 

7,128

 

7,209

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest in subsidiary

 

(285

)

(283

)

 

 

 

 

 

 

Comprehensive income attributable to Brookline Bancorp, Inc.

 

$

6,843

 

$

6,926

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

Three Months Ended March 31, 2012 and 2011 (Unaudited)

 

 

 

Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Treasury
Stock

 

Unallocated
Common Stock
Held by ESOP

 

Total Brookline
Bancorp, Inc.
Stockholders’
Equity

 

Non-
Controlling
Interest in
Subsidiary

 

Total Equity

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

 

$

644

 

$

524,515

 

$

32,357

 

$

2,348

 

$

(62,107

)

$

(2,314

)

$

495,443

 

$

2,505

 

$

497,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Brookline Bancorp, Inc.

 

 

 

7,267

 

 

 

 

7,267

 

 

7,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest in subsidiary

 

 

 

 

 

 

 

 

283

 

283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

(341

)

 

 

(341

)

 

(341

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends of $0.085 per share

 

 

 

(5,006

)

 

 

 

(5,006

)

 

(5,006

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense of stock options granted

 

 

37

 

 

 

 

 

37

 

 

37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation under recognition and retention plan

 

 

59

 

 

 

 

 

59

 

 

59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock held by ESOP committed to be released (11,553 shares)

 

 

60

 

 

 

 

63

 

123

 

 

123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2011

 

$

644

 

$

524,671

 

$

34,618

 

$

2,007

 

$

(62,107

)

$

(2,251

)

$

497,582

 

$

2,788

 

$

500,370

 

 

(Continued)

 

4



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Equity (Continued)

Three Months Ended March 31, 2012 and 2011 (Unaudited)

 

 

 

Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Treasury
Stock

 

Unallocated
Common Stock
Held by ESOP

 

Total Brookline
Bancorp, Inc.
Stockholders’
Equity

 

Non-
Controlling
Interest in
Subsidiary

 

Total Equity

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

$

644

 

$

525,171

 

$

39,993

 

$

1,963

 

$

(62,107

)

$

(2,062

)

$

503,602

 

$

3,400

 

$

507,002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Brookline Bancorp, Inc.

 

 

 

6,349

 

 

 

 

6,349

 

 

6,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest in subsidiary

 

 

 

 

 

 

 

 

285

 

285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares of common stock (10,997,840 shares)

 

110

 

92,712

 

 

 

 

 

92,822

 

 

92,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

494

 

 

 

494

 

 

494

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends of $0.085 per share

 

 

 

(5,944

)

 

 

 

(5,944

)

 

(5,944

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense of stock options granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation under recognition and retention plan

 

 

148

 

 

 

 

 

148

 

 

148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock held by ESOP committed to be released (11,078 shares)

 

 

 

 

 

 

60

 

60

 

 

60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2012

 

$

754

 

$

618,031

 

$

40,398

 

$

2,457

 

$

(62,107

)

$

(2,002

)

$

597,531

 

$

3,685

 

$

601,216

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

(In Thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income attributable to Brookline Bancorp, Inc.

 

$

6,349

 

$

7,267

 

Adjustments to reconcile net income to net cash provided from operating activities:

 

 

 

 

 

Net income attributable to noncontrolling interest in subsidiary

 

285

 

283

 

Income from bank-owned life insurance

 

(295

)

 

Provision for credit losses

 

3,247

 

1,059

 

Origination of loans and leases to be sold

 

(19,747

)

(13,657

)

Proceeds from loans and leases sold

 

22,766

 

13,442

 

Depreciation and amortization of premises and equipment

 

895

 

410

 

Amortization of securities premiums and discounts, net

 

807

 

573

 

Amortization of deferred loan and lease origination costs, net

 

2,563

 

2,359

 

Amortization of identified intangible assets

 

1,283

 

296

 

Amortization (accretion) of acquisition fair value adjustments, net

 

(2,392

)

(131

)

Gain on sale of securities

 

 

(80

)

Write-down of acquired assets

 

 

55

 

Compensation under recognition and retention plans

 

148

 

59

 

Release of ESOP shares

 

60

 

123

 

Deferred income taxes

 

985

 

(131

)

(Increase) decrease in:

 

 

 

 

 

Other assets

 

(7,105

)

5,728

 

Increase (decrease) in:

 

 

 

 

 

Accrued expenses and other liabilities

 

(1,319

)

1,078

 

Net cash provided from operating activities

 

8,530

 

18,733

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

Proceeds from sales

 

 

124

 

Proceeds from principal repayments

 

67,849

 

25,777

 

Purchases

 

 

(25,552

)

Purchase of securities, other

 

(500

)

 

Net increase in loans and leases

 

(80,958

)

(71,301

)

Acquisitions, net of cash and cash equivalents acquired

 

(89,258

)

5,792

 

Monies in escrow — Bancorp Rhode Island, Inc. acquisition

 

112,983

 

 

Purchase of premises and equipment

 

(4,684

)

(329

)

Redemption of restricted securities (FHLBB stock)

 

2,003

 

 

Net cash provided from (used for) investing activities

 

7,435

 

(65,489

)

 

(Continued)

 

6



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Continued)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

(In Thousands)

 

Cash flows from financing activities:

 

 

 

 

 

Increase in demand deposits and NOW, savings and money market savings accounts

 

$

106,122

 

$

108,039

 

Increase (decrease) in certificates of deposit (excluding brokered deposits)

 

(32,098

)

(12,878

)

Proceeds from FHLBB advances

 

690,424

 

918,000

 

Repayment of FHLBB advances

 

(769,656

)

(916,471

)

Proceeds from payment of federal funds purchased

 

 

(13,000

)

Decrease in other borrowings

 

21,514

 

(1,470

)

Increase in other financing activities

 

643

 

40

 

Payment of dividends on common stock

 

(5,944

)

(5,006

)

Net cash provided from financing activities

 

11,005

 

77,254

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

26,970

 

30,498

 

Cash and cash equivalents at beginning of period

 

106,296

 

65,908

 

Cash and cash equivalents at end of period

 

$

133,266

 

$

96,406

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest on deposits, borrowed funds and subordinated debt

 

$

10,778

 

$

8,070

 

Income taxes

 

3,771

 

2,012

 

 

 

 

 

 

 

Acquisition of First Ipswich Bancorp:

 

 

 

 

 

Assets acquired (excluding cash and cash equivalents)

 

$

 

$

245,752

 

Liabilities assumed

 

 

251,544

 

 

 

 

 

 

 

Acquisition of Bancorp Rhode Island, Inc.:

 

 

 

 

 

Assets acquired (excluding cash and cash equivalents)

 

$

1,571,302

 

$

 

Liabilities assumed

 

1,482,044

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2012 and 2011

 

(1)     Basis of Presentation

 

Overview

 

Brookline Bancorp, Inc. (the “Company”) is a bank holding company (within the meaning of the Bank Holding Company Act of 1956, as amended) and the parent of Brookline Bank, a federally-chartered savings bank; Bank Rhode Island (“BankRI”), a Rhode Island-chartered bank; and The First National Bank of Ipswich (“First Ipswich”), a national bank (collectively referred to as the “Banks”). The Company is also the parent of Brookline Securities Corp. (“BSC”). The Company’s primary business is to provide commercial, business and retail banking services to its corporate, municipal and individual customers through its banks and non-bank subsidiaries.

 

Brookline Bank, which includes its wholly-owned subsidiaries, BBS Investment Corp. and Longwood Securities Corp., and its 84.8% owned subsidiary, Eastern Funding LLC (“Eastern Funding”), operates 21 full-service banking offices in Brookline and the greater Boston metropolitan area. BankRI, which includes its wholly-owned subsidiaries, BRI Investment Corp., Macrolease Corporation (“Macrolease”), Acorn Insurance Agency, and BRI Realty Corp., operates 17 full-service branches in Providence County, Kent County and Washington County, Rhode Island. First Ipswich, which includes its wholly-owned subsidiaries, First Ipswich Securities II Corp., First Ipswich Insurance Agency, First Ipswich Realty and FNBI Realty, operates six full-service banking offices on the north shore of eastern Massachusetts and in the Boston metropolitan area.

 

The Company’s activities include acceptance of commercial and retail deposits, origination of mortgage loans on commercial and residential real estate located principally in Massachusetts and Rhode Island, origination of commercial loans and leases to small and mid-sized businesses, origination of indirect automobile loans, investment in debt and equity securities, and the offering of cash management and investment advisory services. The Company also provides specialty equipment financing through its subsidiaries Eastern Funding, which is based in New York City, and Macrolease, which is based in Plainview, New York.

 

The Company is subject to competition from other financial and non-financial institutions and is supervised, examined and regulated by the Board of Governors of the Federal Reserve System (“FRB”). Brookline Bank and First Ipswich are supervised, examined and regulated by the Office of the Comptroller of the Currency (“OCC”). BankRI is also subject to regulation under the laws of the State of Rhode Island and the jurisdiction of the Banking Division of the Rhode Island Department of Business Regulation and is supervised, examined and regulated by the Federal Deposit Insurance Corporation (“FDIC”), which also insures the Banks’ deposits.

 

Financial Statements

 

The Company’s unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as set forth by the Financial Accounting Standards Board (“FASB”) in its Accounting Standards Codification and through the rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of federal securities laws. Certain amounts previously reported have been reclassified to conform to the current year’s presentation.

 

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.

 

In preparing these unaudited consolidated financial statements, management is required to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Actual results could differ from those estimates based upon changing conditions, including economic conditions, and future events. Material estimates that are particularly susceptible to significant change in the near-term include the determination of the allowance for loan and lease losses, the determination of fair market values of assets and liabilities, the review of goodwill and intangibles for impairment, income tax accounting and status of contingencies.

 

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Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2012 and 2011

 

The judgments used by management in applying these critical accounting policies may be affected by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results. For example, subsequent evaluations of the loan and lease portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan and lease losses in future periods, and the inability to collect outstanding principal may result in increased loan and lease losses.

 

The unaudited interim results of consolidated operations are not necessarily indicative of the results for any future interim period or for the entire year. These unaudited consolidated financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the annual consolidated financial statements and accompanying notes included in the Company’s 2011 Annual Report on Form 10-K and Bancorp Rhode Island’s audited financial statements as of and for the years ended December 31, 2011 and 2010 included in the Company’s Forms 8-K/A filed with the SEC.

 

(2)     Recent Accounting Pronouncements

 

In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs. This Update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (“IFRSs.”). The amendments in this Update explain how to measure fair value.  They do not require additional fair value measurements and are not intended to result in a change in the application of current fair value measurement requirements. The amendments in this Update are effective during interim and annual periods beginning after December 15, 2011.  The adoption of ASU No. 2011-04, in January 2012, did not have a material impact on the Company’s financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The objective of this Update is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  Under the amendments in this Update, a company has the option to present the total of comprehensive income and details of each of its components (net income and other comprehensive income) either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  The amendments in this Update are effective during interim and annual periods beginning after December 15, 2011.  As ASU No. 2011-05 only deals with presentation requirements, the adoption of ASU No. 2011-05 in January 2012 did not have any impact on the Company’s financial statements. The FASB recently announced the addition of a FASB agenda project to consider deferring certain aspects of ASU No. 2011-05, “Presentation of Comprehensive Income” related to the presentation of reclassification adjustments from other comprehensive income to net income.

 

In September 2011, the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350). ASU No. 2011-08 applies to all entities that have goodwill reported in their financial statements. Under the amendments, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the

 

9



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2012 and 2011

 

impairment loss, if any. An entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU No. 2011-08, in January 2012, did not have a material impact on the Company’s financial statements.

 

(3)     Acquisition

 

Bancorp Rhode Island, Inc.

 

On January 1, 2012 (the “Bancorp Rhode Island Acquisition Date”), the Company acquired all the assets and liabilities of Bancorp Rhode Island, Inc., the bank holding company for BankRI. As part of the acquisition, Bancorp Rhode Island, Inc. was merged into the Company and no longer exists as a separate entity. BankRI, a commercial bank with 17 branches serving businesses and individuals in Rhode Island and nearby Massachusetts, continues to operate as a separate bank subsidiary of the Company.

 

Total consideration paid in the acquisition was $205.8 million, which consisted of approximately 11.0 million shares of stock with a par value of $0.1 million and a fair value of $92.8 million and $113.0 million in cash. Stock consideration was paid at the rate of 4.686 shares of Brookline Bancorp common stock per share of Bancorp Rhode Island common stock. The assets acquired and the liabilities assumed in the acquisition were recorded by the Company at their estimated fair values as of the Bancorp Rhode Island Acquisition Date. The excess of consideration paid over the fair value of identifiable net assets was recorded as goodwill in the unaudited consolidated financial statements.

 

The following table presents the goodwill recorded in connection with the acquisition of Bancorp Rhode Island, Inc. Dollar amounts are presented in thousands.

 

Brookline Bancorp, Inc. common stock issued to Bancorp Rhode Island stockholders

 

$

92,822

 

Cash consideration to Bancorp Rhode Island stockholders

 

112,983

 

Total consideration paid

 

205,805

 

 

 

 

 

Fair value of identifiable net assets acquired

 

112,660

 

 

 

 

 

Goodwill

 

$

93,145

 

 

10



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2012 and 2011

 

Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized. None of the goodwill is expected to be deductible for income tax purposes. The acquisition date estimated fair values of the assets acquired and liabilities assumed are summarized as follows:

 

 

 

As Recorded at
Acquisition

 

 

 

(In Thousands)

 

Assets Acquired:

 

 

 

Cash and cash equivalents

 

$

23,402

 

Investment securities available for sale

 

312,620

 

FHLB stock

 

16,274

 

Loan and lease receivables

 

1,135,816

 

Premises and equipment

 

12,780

 

Deferred tax asset

 

26,120

 

Identified intangible assets

 

21,918

 

Bank owned life insurance

 

32,496

 

Other assets

 

13,278

 

Total assets acquired

 

1,594,704

 

 

 

 

 

Liabilities Assumed:

 

 

 

Deposits

 

1,133,358

 

Overnight and short-term borrowings

 

46,216

 

Federal Home Loan Bank advances

 

251,378

 

Subordinated deferrable interest debentures

 

12,703

 

Deferred tax liability

 

12,225

 

Other liabilities

 

26,164

 

Total liabilities assumed

 

1,482,044

 

 

 

 

 

Identifiable net assets acquired

 

$

112,660

 

 

The above summary includes adjustments that record the acquired assets and assumed liabilities at the respective fair value, based on management’s best estimates using the information available at this time. While there may be changes in respective acquisition date fair values of certain balance sheet amounts, and other items, management does not expect that such changes, if any, will be material.

 

Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

 

Loans and Leases

 

The acquired loans and leases were recorded at fair value at the Bancorp Rhode Island Acquisition Date without carryover of BankRI’s allowance for loan and lease losses of $18.1 million. The fair value of the loans and leases was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and leases and then applying a market-based discount rate to those cash flows. In this regard, the acquired loans and leases were segregated into pools based on loan or lease type and credit risk. Loan or lease type was determined based on collateral type and purpose, location, industry segment and loan structure. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), updated loan-to-value ratios, and lien position. For valuation purposes, these pools were further disaggregated by maturity and pricing characteristics (fixed rate, adjustable rate, balloon maturities).

 

The estimate of future credit losses on the acquired loan and lease portfolio was based on segregating the acquired loans and leases into the classes referred to in the preceding paragraph, the risk characteristics and credit quality indicators related to each loan/lease class, and evaluation of the collectability of larger individual non-performing and classified loans and leases. Increases in the estimate of expected future credit losses in subsequent periods will require the Company to record an allowance

 

11



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2012 and 2011

 

for loan and lease losses with a corresponding charge to earnings (provision for loan and lease losses). Improvement in expected cash flows in future periods will result in a reduction of the nonaccretable discount with such amount subsequently recognized as interest income over the remaining lives of the related acquired loans and leases. Charge-offs of acquired loans and leases are first applied to the nonaccretable discount and then to any allowance for loan and lease losses established subsequent to the acquisition.

 

Information about the acquired loan and lease portfolio subject to ASC 310-30 as of January 1, 2012 is as follows:

 

 

 

ASC 310-30 Loans

 

 

 

(In Thousands)

 

 

 

 

 

Contractually required principal and interest at acquisition

 

$

554,553

 

Contractual cash flows not expected to be collected (nonaccretable discount)

 

(14,659

)

Expected cash flows at acquisition

 

539,894

 

Interest component of expected cash flows (accretable yield)

 

(81,503

)

Fair value of acquired loans

 

$

458,391

 

 

The fair value of acquired loans and leases which fall under ASC 310-20 at January 1, 2012 is $677.4 million.

 

Premises and Equipment

 

The fair value of BankRI’s premises, including land, buildings and improvements, was determined based upon appraisal by licensed appraisers.  These appraisals were based upon the best and highest use of the property with final values determined based upon an analysis of the cost, sales comparison, and income capitalization approaches for each property appraised.  This fair value of Bank-owned real estate resulted in an estimated premium of $1.7 million, amortized over the weighted average remaining useful life of the properties, estimated to be 25 years.

 

The majority of leasehold interests were valued based upon the income approach, developed by licensed appraisers utilizing market rental rates developed through comparable lease signings, third-party information regarding the local market for comparable properties with similar utility, and a review of the contractual terms of the leases.  The discount of leasehold interests is estimated at $1.0 million and is being accreted over the weighted average remaining life of the underlying leases.

 

Identified Intangible Assets

 

The fair value of the core deposit intangible (“CDI”) was determined based on a discounted cash flow analysis using a discount rate based on the estimated cost of capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through the Federal Home Loan Bank. The life of the deposit base and projected deposit attrition rates were determined using BankRI’s historical deposit data. The CDI was valued at $19.4 million or 1.71% of deposits. The intangible asset is being amortized over a weighted average life of ten years using the sum-of-the-years digits method. Amortization for the three months ended March 31, 2012 was $0.9 million.

 

Other intangible assets associated with the BankRI acquisition included a trade name intangible valued at $1.6 million and a non-compete agreement valued at $0.9 million. These intangible assets are being amortized over eleven years and two years respectively using the sum-of-the-years digits method. Amortization for the three months ended March 31, 2012 was $0.2 million. Amortization expense of acquisition-related intangible assets is included in other non-interest expense in the unaudited consolidated statements of income.

 

Scheduled amortization expense attributable to the core deposit intangible, trade name, and non-compete agreement for the full year of 2012 and each of the next five years is as follows: $4.3 million in 2012; $3.6 million in 2013; $2.9 million in 2014; $2.6 million in 2015; $2.2 million in 2016; and $1.9 million in 2017. There were no impairment losses relating to goodwill or other acquisition-related intangible assets recorded during the three months ended March 31, 2012 or 2011.

 

Deposits

 

The fair value adjustment of deposits represents discounted value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar term certificates of deposit.  The resulting fair value adjustment of certificates of deposit range in maturity from three months to over four years is a $2.0 million discount and is being accreted into income on a level-yield basis over the weighted average remaining life of approximately 14 months.

 

Federal Home Loan Bank Advances

 

The fair value of Federal Home Loan Bank of Boston (“FHLBB”) advances represents contractual repayments discounted using interest rates currently available on borrowings with similar characteristics and remaining maturities. The resulting fair value adjustment on FHLBB advances was $16.3 million and is being amortized on a level yield basis over the remaining life of the borrowings which have a weighted average remaining life of approximately 3.5 years.

 

Other Liabilities

 

The fair value adjustment to other liabilities includes $5.6 million of compensation accruals related to executive severance and cash payments made post-acquisition to settle vested stock options and restricted stock.

 

12



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2012 and 2011

 

In addition, BankRI maintains Supplemental Executive Retirement Plans (the “SERPs”) for certain of its senior executives under which participants designated by the Board of Directors are entitled to an annual retirement benefit. Annual amounts related to the SERPs are recorded based on an actuarial calculation. Actuarial gains and losses are reflected immediately in the statement of operations.

 

The liability for the postretirement benefit obligation related to the BankRI SERPs included in accrued expenses and other liabilities was $10.4 million at March 31, 2012.  The Company incurred a related net periodic benefit expense related to these plans of $0.1 million for the three months ended March 31, 2012.

 

Deferred Tax Assets and Liabilities

 

Deferred tax assets and liabilities were established for purchase accounting fair value adjustments as the future amortization/accretion of these adjustments represent temporary differences between book income and taxable income. In addition, the deferred tax asset related to the BankRI allowance for loan and lease losses and the deferred tax liability related to the BankRI tax-deductible goodwill were written off.

 

Financial Information — Acquisition

 

The Company’s consolidated results of operations for the three months ended March 31, 2012 include $15.2 million of net interest income and $1.7 million of net income from the results of BankRI from the acquisition date. Expenses relating to the transaction amounted to $5.4 million and were included in the March 31, 2012 income statement.

 

The following summarizes the unaudited pro forma results of operations as if the Company had acquired Bancorp Rhode Island, Inc. on January 1, 2011.

 

 

 

Three Months Ended

 

 

 

March 31, 2011

 

 

 

(In Thousands Except Per
Share Data)

 

 

 

 

 

Net interest income

 

$

41,844

 

Net income

 

5,733

 

Basic and diluted earnings per share

 

0.08

 

 

Amounts in the pro forma table above includes acquisition related expenses of $4.0 million, net of tax, and additional amortization of $0.7 million for the period ended March 31, 2011.

 

The supplemental pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the acquisition been completed at the beginning of the period presented, nor is it indicative of future results for any other interim or full year period.

 

13



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2012 and 2011

 

(4)     Investment Securities

 

Investment securities available-for-sale are summarized below:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

 

 

(In Thousands)

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSEs

 

$

127,312

 

$

627

 

$

58

 

$

127,881

 

$

92,402

 

$

673

 

$

6

 

$

93,069

 

Municipal obligations

 

1,252

 

56

 

2

 

1,306

 

1,250

 

55

 

2

 

1,303

 

Auction-rate municipal obligations

 

2,700

 

 

210

 

2,490

 

2,700

 

 

210

 

2,490

 

Corporate debt obligations

 

32,300

 

416

 

183

 

32,533

 

41,490

 

400

 

536

 

41,354

 

Trust preferred securities

 

4,082

 

12

 

659

 

3,435

 

3,928

 

9

 

934

 

3,003

 

GSE CMOs

 

5,520

 

78

 

31

 

5,567

 

2,961

 

83

 

19

 

3,025

 

GSE MBS

 

273,700

 

3,366

 

696

 

276,370

 

68,181

 

3,338

 

15

 

71,504

 

Private-label collateralized mortgage obligations

 

9,991

 

237

 

9

 

10,219

 

366

 

22

 

10

 

378

 

SBA commercial loan asset-backed securities

 

421

 

1

 

1

 

421

 

443

 

1

 

1

 

443

 

Total debt securities

 

457,278

 

4,793

 

1,849

 

460,222

 

213,721

 

4,581

 

1,733

 

216,569

 

Marketable equity securities

 

1,240

 

36

 

 

1,276

 

834

 

28

 

 

862

 

Total securities available-for-sale

 

$

458,518

 

$

4,829

 

$

1,849

 

$

461,498

 

$

214,555

 

$

4,609

 

$

1,733

 

$

217,431

 

 

Debt securities of U.S. Government-sponsored enterprises (“GSEs”) include obligations issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association (“GNMA”), the Federal Home Loan Banks and the Federal Farm Credit Bank. At March 31, 2012, none of those obligations are backed by the full faith and credit of the U.S. Government, except for GNMA mortgage-backed securities (“MBS”) or collateralized mortgage obligations (“CMOs”) and Small Business Administration (“SBA”) securities with an estimated fair value of $8.0 million.

 

Investment Securities as Collateral

 

At March 31, 2012 and December 31, 2011, respectively, $360.6 million and $156.0 million of securities available-for-sale were pledged as collateral for repurchase agreements; municipal deposits; treasury; tax and loan deposits; swap agreements; current and future FHLBB borrowings; and future Federal Reserve “discount window” borrowings.

 

14



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2012 and 2011

 

Other-Than-Temporary Impairment (“OTTI”)

 

Investment securities at March 31, 2012 and December 31, 2011 that have been in a continuous unrealized loss position for less than twelve months or twelve months or longer are as follows:

 

15



Table of Contents

 

BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2012 and 2011

 

 

 

March 31, 2012

 

 

 

Less than Twelve Months

 

Twelve Months or Longer

 

Total

 

 

 

Estimated
Fair Value

 

Unrealized
Losses

 

Estimated
Fair Value

 

Unrealized
Losses

 

Estimated
Fair Value

 

Unrealized
Losses

 

 

 

(In Thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

GSEs

 

$

25,065

 

$

58

 

$

 

$

 

$

25,065

 

$

58

 

Municipal obligations

 

201

 

2

 

 

 

201

 

2

 

Auction-rate municipal obligations

 

 

 

2,490

 

210

 

2,490

 

210

 

Corporate obligations

 

5,689

 

183

 

 

 

5,689

 

183

 

Trust preferred securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

With OTTI loss

 

 

 

77

 

64

 

77

 

64

 

Without OTTI impairment loss

 

1,163

 

20

 

1,809

 

575

 

2,972

 

595

 

GSE CMOs

 

3,147

 

31

 

 

 

3,147

 

31

 

GSE MBS

 

150,464

 

693

 

64

 

3

 

150,528

 

696

 

Private-label collateralized mortgage obligations

 

3,206

 

9

 

 

 

3,206

 

9

 

SBA commercial loan asset- backed securities

 

56

 

1

 

 

 

56

 

1

 

Total temporarily impaired securities

 

$

188,991

 

$

997

 

$

4,440

 

$

852

 

$

193,431

 

$

1,849

 

 

 

 

December 31, 2011

 

 

 

Less than Twelve Months

 

Twelve Months or Longer

 

Total

 

 

 

Estimated
Fair Value

 

Unrealized
Losses

 

Estimated
Fair Value

 

Unrealized
Losses

 

Estimated
Fair Value

 

Unrealized
Losses

 

 

 

(In Thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

GSEs

 

$

4,026

 

$

6

 

$

 

$

 

$

4,026

 

$

6

 

Municipal obligations

 

201

 

2

 

 

 

201

 

2

 

Auction-rate municipal obligations

 

 

 

2,490

 

210

 

2,490

 

210

 

Corporate obligations

 

10,703

 

536

 

 

 

10,703

 

536

 

Trust preferred securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

With OTTI loss

 

 

 

75

 

66

 

75

 

66

 

Without OTTI impairment loss

 

830

 

170

 

1,690

 

698

 

2,520

 

868

 

GSE CMOs

 

496

 

19

 

 

 

496

 

19

 

GSE MBS

 

1,712

 

15

 

 

 

1,712

 

15

 

Private-label collateralized mortgage obligations

 

93

 

10

 

 

 

93

 

10

 

SBA commercial loan asset- backed securities

 

59

 

1

 

 

 

59

 

1

 

Total temporarily impaired securities

 

$

18,120

 

$

759

 

$

4,255

 

$

974

 

$

22,375

 

$

1,733

 

 

The Company performs regular analysis on the available-for-sale securities portfolio to determine whether a decline in fair value indicates that an investment is other-than-temporarily impaired (“OTTI”). In making these OTTI

 

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2012 and 2011

 

determinations, management considers, among other factors, the length of time and extent to which the fair value has been less than amortized cost, projected future cash flows, credit subordination and the creditworthiness, capital adequacy and near-term prospects of the issuers.

 

Management also considers the Company’s capital adequacy, interest-rate risk, liquidity and business plans in assessing whether it is more likely than not that the Company will sell or be required to sell the securities before recovery. If the Company determines that a decline in fair value is OTTI and that it is more likely than not that the Company will not sell or be required to sell the security before recovery of its amortized cost, the credit portion of the impairment loss is recognized in earnings and the noncredit portion is recognized in accumulated other comprehensive income. The credit portion of the OTTI impairment represents the difference between the amortized cost and the present value of the expected future cash flows of the security. If the Company determines that a decline in fair value is OTTI and it is more likely than not that it will sell or be required to sell the security before recovery of its amortized cost, the entire difference between the amortized cost and the fair value of the security will be recognized in earnings.

 

At March 31, 2012, the Company did not intend to sell any of its debt securities and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost. The unrealized losses on all debt securities within the securities portfolio without other-than-temporary impairment loss were considered by management to be temporary in nature. Full collection of those debt securities is expected because the financial condition of the issuers is considered to be sound, there has been no default in scheduled payments and the debt securities are rated investment grade except trust preferred securities and private-label CMOs with an estimated fair value of $7.5 million and net unrealized losses of $0.3 million.

 

The Company’s portfolio of trust preferred securities includes the Company’s investment in three trust preferred pools (“PreTSLs”). The Company monitors these pools closely for impairment due to a history of losses experienced. The following tables summarize the pertinent information as of March 31, 2012, that was considered in determining whether OTTI existed on these PreTSLs:

 

 

 

Class

 

Deferrals/
Defaults/
Losses to
Date (1)

 

Estimated Total
Remaining
Projected
Defaults (2)

 

Estimated Excess
Subordination (3)

 

Lowest
Credit
Rating to
Date (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

Pooled Trust Preferred Security A

 

Mezzanine

 

74

%

14

%

0

%

C

 

Pooled Trust Preferred Security B

 

A-1

 

27

%

16

%

37

%

CCC

 

Pooled Trust Preferred Security C

 

Mezzanine

 

40

%

21

%

0

%

C

 

 


(1)         As a percentage of original collateral.

(2)         As a percentage of performing collateral.

(3)         Excess subordination represents the additional defaults/losses in excess of both current and projected defaults/losses that the security can absorb before the security is exposed to a loss in principal, after taking into account the best estimate of future deferrals/defaults/losses.

(4)         The Company reviewed credit ratings provided by S&P and Moody’s in 2010 in its evaluation of issuers.

 

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2012 and 2011

 

 

 

 

 

 

 

Gross

 

 

 

Total Cumulative
OTTI

 

 

 

Current
Par

 

Amortized
Cost (1)

 

Unrealized
Loss

 

Fair
Value

 

Credit-
Related

 

Credit and
Non-Credit

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pooled Trust Preferred Security A

 

$

267

 

$

141

 

$

(64

)

$

77

 

$

118

 

$

118

 

Pooled Trust Preferred Security B

 

932

 

927

 

(227

)

700

 

 

 

Pooled Trust Preferred Security C

 

967

 

184

 

(15

)

169

 

 

 

Total Pooled Trust Preferred Securities

 

$

2,166

 

$

1,252

 

$

(306

)

$

946

 

$

118

 

$

118

 

 


(1)   The amortized cost reflects previously recorded credit-related OTTI charges recognized in earnings for the applicable securities.

 

In performing the analysis for OTTI impairment on the PreTSLs, expected future cash flow scenarios for each pool were considered under varying levels of severity for assumptions including future delinquencies, recoveries and prepayments. The Company also considered its relative seniority within the pools and any excess subordination. The Company’s OTTI assessment for the quarter ended March 31, 2012 was as follows:

 

Pooled Trust Preferred Security A (“PreTSL A”)

 

PreTSL A has experienced $30 million in deferrals, or 74% of the security’s underlying collateral, to date. The Company recorded a total of $0.1 million in OTTI on this security in 2009 and 2010 as a result of the Company’s analysis of expected and contractual cash flows. During the first quarter of 2012, there was no change in the deferral or default schedules and no further rating actions were noted. Furthermore, management was not aware of adverse changes in performance indicators for the underlying banks that issued collateral into the pool. Based on the security’s future expected cash flows and after factoring in projected defaults of 14% over its remaining life, the security’s current amortized cost (53% of current par) and the Company’s intent and ability to hold the security until recovery, the Company believes that no further OTTI charges are warranted at this time.

 

Pooled Trust Preferred Security B (“PreTSL B”)

 

PreTSL B has experienced $97 million in deferrals/defaults, or 27% of the security’s underlying collateral, to date. During the first quarter of 2012, there was no change in the deferral or default schedules and no further rating actions. Based on the security’s future expected cash flows and after factoring in projected defaults of 16% over its remaining life, the security’s current amortized cost (99% of current par), $98 million in excess subordination (37% of outstanding performing collateral) and the Company’s intent and ability to hold the security until recovery, the Company believes that no OTTI charges are warranted at this time.

 

Pooled Trust Preferred Security C (“PreTSL C”)

 

PreTSL C was acquired on January 1, 2012 as part of the Company’s merger with Bancorp Rhode Island, Inc. PreTSL C has experienced $79 million in deferrals/defaults, or 40% of the security’s underlying collateral, to date. During the first quarter of 2012, there was no change in the deferral or default schedules and no further rating actions. Based on the security’s future expected cash flows and after factoring in projected defaults of 21% over its remaining life, the security’s current amortized cost (19% of current par) and the Company’s intent and ability to hold the security until recovery, the Company believes that no OTTI charges are warranted at this time.

 

The amount related to credit losses on debt securities held at March 31, 2012 for which a portion of an OTTI was recognized in other comprehensive income was $0.1 million.

 

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2012 and 2011

 

Portfolio Maturities

 

The maturities of the investments in debt securities at March 31, 2012 are as follows:

 

 

 

Available-for-Sale

 

 

 

Amortized
Cost

 

Estimated
Fair Value

 

 

 

(In Thousands)

 

 

 

 

 

 

 

Within 1 year

 

$

49,463

 

$

49,972

 

After 1 year through 5 years

 

117,925

 

118,673

 

After 5 years through 10 years

 

67,416

 

70,032

 

Over 10 years

 

222,474

 

221,545

 

 

 

$

457,278

 

$

460,222

 

 

Actual maturities of GSE debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty. At March 31, 2012, issuers of debt securities with an estimated fair value of approximately $52.6 million had the right to call or prepay the obligations, the scheduled maturities of which were $42.9 million after one through five years, $0.7 million after five years though ten years and $9.1 million after ten years. MBS and CMOs are included above based on their contractual maturities; the remaining lives, however, are expected to be shorter due to anticipated payments.

 

Security Sales

 

Sales of investment securities are summarized in the table below. There were no writedowns.

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

(In Thousands)

 

Sales of debt securities:

 

 

 

 

 

Proceeds from sales

 

$

 

$

124

 

Gross gains from sales

 

 

80