BROOKLINE BANCORP INC - 10-Q filing on 2020-05-29

Commitments and Contingencies

3 Months Ended

Mar. 31, 2020

Off-Balance Sheet Financial Instruments

The Company is party to off-balance sheet financial instruments in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby and commercial letters of credit, and loan level derivatives. According to GAAP, these financial instruments are not recorded in the financial statements until they are funded or related fees are incurred or received.

The contract amounts reflect the extent of the involvement the Company has in particular classes of these instruments. Such commitments involve, to varying degrees, elements of credit risk and interest-rate risk in excess of the amount recognized in the consolidated balance sheets. The Company's exposure to credit loss in the event of non-performance by the counterparty is represented by the fair value of the instruments. The Company uses the same policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Financial instruments with off-balance-sheet risk at the dates indicated follow:



	At March 31, 2020		At December 31, 2019
	(In Thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans and leases:
Commercial real estate	$	40,933	$	50,034
Commercial	93,724		78,058
Residential mortgage	52,930		25,998
Unadvanced portion of loans and leases	713,352		808,681
Unused lines of credit:
Home equity	537,313		528,251
Other consumer	25,362		25,374
Other commercial	406		380
Unused letters of credit:
Financial standby letters of credit	11,094		10,166
Performance standby letters of credit	6,107		4,652
Commercial and similar letters of credit	3,823		3,823
Loan level derivatives (Notional principal amounts):
Receive fixed, pay variable	1,231,096		1,101,193
Pay fixed, receive variable	1,231,096		1,101,193
Risk participation-out agreements	233,846		235,693
Risk participation-in agreements	49,279		55,281
Foreign exchange contracts (Notional amounts):
Buys foreign currency, sells U.S. currency	1,422		1,125
Sells foreign currency, buys U.S. currency	1,530		1,230

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee by the customer. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if any, is based on management's credit evaluation of the borrower.

Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee performance of a customer to a third party. These standby and commercial letters of credit are primarily issued to support the financing needs of the Company's commercial customers. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

From time to time, the Company enters into loan level derivatives, risk participation agreements or foreign exchange contracts with commercial customers and third-party financial institutions. These derivatives allow the Company to offer long-term fixed-rate commercial loans while mitigating the interest-rate or foreign exchange risk of holding those loans. In a loan level derivative transaction, the Company lends to a commercial customer on a floating-rate basis and then enters into a loan level derivative with that customer. Concurrently, the Company enters into offsetting swaps with a third-party financial institution, effectively minimizing its net interest-rate risk exposure resulting from such transactions.

The fair value of derivative assets and liabilities was $157.5 million and $155.4 million, respectively, as of March 31, 2020. The fair value of derivative assets and liabilities was $60.6 million and $59.7 million, respectively, as of December 31, 2019.

The fair value of foreign exchange assets and liabilities was $224 thousand and $200 thousand, respectively, as of March 31, 2020. The fair value of foreign exchange assets and liabilities was $54 thousand and $53 thousand as of December 31, 2019.

Lease Commitments

The Company leases certain office space under various noncancellable operating leases as well as certain other assets. These leases have original terms ranging from 3 years to over 25 years. Certain leases contain renewal options and escalation clauses which can increase rental expenses based principally on the consumer price index and fair market rental value provisions. All of the Company's current outstanding leases are classified as operating leases.

The Company considered the following criteria when determining whether a contract contains a lease, the existence of an identifiable asset and the right to obtain substantially all of the economic benefits from use of the asset through the period. The Company used the FHLB classic advance rates available as of the date of the lease origination as the discount rate to determine the net present value of the remaining lease payments.



	At March 31, 2020		At March 31, 2019
	(In Thousands)
The components of lease expense were as follow:
Operating lease cost	$	1,611	$	1,459

Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	1,658	$	1,525
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases	$	—	$	71



	At March 31, 2020			At December 31, 2019
	(In Thousands)
Supplemental balance sheet information related to leases was as follows:
Operating Leases
Operating lease right-of-use assets	$	24,789		$	24,876
Operating lease liabilities	24,789			24,876

Weighted Average Remaining Lease Term
Operating leases	7.32			7.47

Weighted Average Discount Rate
Operating leases	3.2		%	3.2		%

A summary of future minimum rental payments under such leases at the dates indicated follows:



	Minimum Rental Payments
	March 31, 2020
	(In Thousands)

Remainder of 2020	$	4,608
Year ending:
2021	5,560
2022	4,833
2023	3,907
2024	2,547
2025	1,515
Thereafter	4,675
Total	$	27,645
Less imputed interest	(2,856		)
Present value of lease liability	$	24,789

Certain leases contain escalation clauses for real estate taxes and other expenditures, which are not included above. The total real estate taxes were $0.5 million and other expenditures were $0.1 million for the three months ended March 31, 2020 and 2019. Total rental expense was $1.6 million and $1.4 million for the three months ended March 31, 2020 and 2019, respectively.

Legal Proceedings

In the normal course of business, there are various outstanding legal proceedings. In the opinion of management, after consulting with legal counsel, the consolidated financial position and results of operations of the Company are not expected to be affected materially by the outcome of such proceedings.