Brookline Bancorp: Taking The Cautious Approach Amidst A Mixed Picture (NASDAQ:BRKL)

From my experience, most investment opportunities that I come across are either clearly attractive or clearly unattractive. But every so often, I find an opportunity that is on the border between the two. A good example of this that I could point to involves a bank holding company by the name of Brookline Bancorp (NASDAQ:BRKL). With a market capitalization of around $795 million, this player is a pretty small one in the industry. That’s good in the sense that it means that the stock is likely overlooked by many investors. However, some companies are small for a reason.

Over the past few years, the institution has seen some pretty attractive growth when it comes to the value of its deposits. But financial performance from an income statement perspective has been a bit mixed. Shares don’t look particularly cheap relative to earnings, though they are very affordable on a net asset value basis. Unfortunately, the quality of the assets is quite low. And that is definitely a negative in my book. This paints a very conflicting picture that is difficult to assess. But after significant thought on the matter and reviewing the company’s overall operations, I think that it’s best to remain cautious and proceed with a ‘hold’ rating at this time.

An interesting bank

According to the management team at Brookline Bancorp, the company operates as a bank holding firm for Brookline Bank, as well as its subsidiaries. Brookline Bank is based out of Boston, Massachusetts. And it operates from 29 full-service banking offices, as well as two lending offices, all of which are located in the Greater Boston metropolitan area. But this isn’t all that the company has. Another one of its subsidiaries, BankRI, has 22 full-service banking offices located in Rhode Island. In addition to this, the firm has another subsidiary known as PCSB Financial that serves as a separate bank in New York. All combined, it has 14 banking offices in the areas in which it exists.

From these locations, the institution provides customers with a wide array of financial services. Examples include the issuance of consumer and residential loans, as well as a slew of offerings available through its own online services. The company also provides customers with investment services, and it works with small and medium-sized businesses in order to facilitate the purchase of equipment, not to mention other assets.

Over the past few years, the institution has done quite well when it comes to the value of deposits on its books. Even though deposits fell from $7.05 billion in 2021 to $6.52 billion in 2022, there was a surge to $8.55 billion in 2023. This seems to be in large part because of its acquisition of PCSB Bank. But deposit growth is deposit growth nonetheless. In fact, deposits continued to expand into the first quarter of the 2024 fiscal year, climbing to $8.72 billion. It’s also worth noting that uninsured deposit exposure is quite low. As of this writing, 26.3% of overall deposits are classified as uninsured. This is just below the 30% maximum threshold that I typically like to see with attractive opportunities. So that is a net positive in my book.

With a growth in the value of deposits, the institution has also seen a growth in the value of loans on its books. These have expanded from $7.06 billion to $9.52 billion over the past three years. By the first quarter of 2024, loans had grown further to $9.54 billion. Based on the data provided, about 59.6% of all loans are dedicated to commercial real estate. Another 25% is attributed to commercial loans and leases, while the rest of its loans are on the consumer side. One big downside to me is the fact that about 14.5% of the company’s commercial real estate portfolio, accounting for 8.6% of total loans, are dedicated to office buildings. This is an area that is very scary for many investors at this point in time. The shift toward remote work has proven to be an issue and that shift could, to some extent, persist for the long haul. It would be one thing if most of these office properties were owner occupied. However, 91.4% of the value of these loans are non-owner occupied.

As the value of loans increased, other parts of the balance sheet changed. The value of securities on the firm’s books grew from $720.9 million to $916.2 million over the past three years. However, we did see a decline to $865.4 million as of the end of the first quarter of 2024. The value of cash has been volatile, as the first chart in this article illustrates. However, it is worth noting that the value of debt is declining. After peaking at $1.43 billion in 2022, debt has since fallen, hitting $1.36 billion as of the end of the first quarter of this year.

Even though the general trend for the balance sheet has been toward growth, the same cannot necessarily be said of the company’s income statement. It is true that net interest income has increased over the past three years, climbing from $290.2 million to $301.5 million. Higher interest rates, combined with asset growth, helped to lead this charge. Net interest income continued to grow, in fact, hitting $74.2 million in the most recent quarter for which data is available. That’s comfortably above the $60.5 million reported just one year earlier. However, we have seen a bit of weakness involving non-interest income. After climbing to $31.9 million in 2023, the figure dipped to $6.3 million as of the most recent quarter. That’s less than half the $12.9 million reported for the first quarter of last year. On the bottom line, meanwhile, the picture has exhibited a rather negative trend. From 2021 to 2023, net profits fell from $115.4 million to $75 million. The good news, at least, is that we saw an improvement in the first quarter of this year, with net profits of $14.7 million dwarfing the $7.6 million reported the same time of 2023.

Even though profitability did take a hit last year, shares of the business are not particularly expensive. But I wouldn’t call them cheap either. In the chart above, you can see how shares are priced on a price to earnings basis. That chart also shows results for five similar firms that I decided to compare Brookline Bancorp to. Two of the five ended up being cheaper than our candidate, while another was tied with it. But this isn’t the only way to value a bank. In the chart below, you can see how shares are priced relative to both book value and tangible book value. On a price to book basis, Brookline Bancorp ended up being the cheapest of the group. And when we use the price to tangible book approach, only one of the five institutions was cheaper than it.

Valuation is obviously important. However, we also should be paying attention to the quality of assets. One way to do this is to look at the return on assets, not only for Brookline Bancorp, but also for the same five firms that I have been comparing it to throughout this article. Unfortunately, as the first chart below illustrates, Brookline Bancorp ended up being the weakest of the group. The same held true in the subsequent chart, where I looked at the return on equity for each of the institutions.

Takeaway

This was one of the more difficult prospects for me to appropriately evaluate. I say this because there is a lot of good in the numbers provided, but there is a lot of bad in them as well. Relative to book value, shares are incredibly cheap. I continue to be impressed by the growth in deposits and loans on the firm’s books. Debt is falling, and uninsured deposit exposure is within the acceptable range. However, relative to earnings, shares look more or less fairly valued. In addition to this, the quality of the firm’s assets appears low. Add on top of this the weakness the institution has had from an income statement perspective, not to mention the exposure the institution has to office assets, and I ultimately opted to follow the safer route and rate the enterprise a ‘hold’.