Executive Summary / Key Takeaways

• Brookline Bancorp is strategically repositioning its balance sheet through intentional loan portfolio contraction, particularly in commercial real estate and specialty vehicle finance, while focusing on core customer relationships and growth in general C&I and consumer segments.
• Recent financial performance shows improving net interest margin, driven by decreasing funding costs, despite a slight decline in asset yields, reflecting adaptation to the current interest rate environment.
• Asset quality, while experiencing some isolated, specific credit challenges in recent quarters, is managed with robust allowance methodologies and specific reserves, with management optimistic about a return to more normalized performance.
• The planned merger of equals with Berkshire Hills Bancorp (BHLB) is a transformative step aimed at creating a larger, more efficient Northeast franchise, with regulatory filings underway and operational integration planning, including core platform selection, progressing towards an anticipated February 2026 closing.
• Management guidance for 2025 anticipates low single-digit loan growth, 4-5% deposit growth, stable noninterest income, and controlled expenses (excluding merger costs), signaling a focus on efficiency and strategic integration ahead of the merger.

Setting the Scene: A Regional Player Adapting to Shifting Tides

Brookline Bancorp, Inc. (NASDAQ:BRKL) operates as a multi-bank holding company deeply embedded in the financial landscape of the Northeast United States. Through its subsidiary banks – Brookline Bank in Massachusetts, Bank Rhode Island (BankRI), and PCSB Bank in New York – alongside its equipment financing arm, Eastern Funding, and wealth management division, Clarendon Private, the company provides a comprehensive suite of commercial, business, and retail banking services. This multi-bank structure, a result of strategic acquisitions over time including BankRI and PCSB Bank, is foundational to BRKL's approach, enabling both organic growth and expansion through M&A. The strategy emphasizes profitably growing commercial lending while maintaining a strong customer focus, leveraging local branding and decision-making for credit and pricing, even as back-office functions are consolidated.

In the competitive Northeast banking market, BRKL finds itself positioned among a diverse group of rivals, from larger super-regional players like Citizens Financial Group (CFG) to regional peers such as Eastern Bankshares (EBC), Independent Bank Corp. (INDB), and its future partner, Berkshire Hills Bancorp. Competition for loans and deposits remains robust, influenced by the Federal Reserve's interest rate actions and broader economic conditions. While BRKL's long-standing community brand fosters customer loyalty, it competes in an environment increasingly shaped by technological capabilities. BRKL offers standard online and mobile banking services and cash management tools, capabilities that are now table stakes. Larger competitors like CFG boast more extensive digital platforms, while peers like EBC and INDB have also invested in digital transformation, sometimes demonstrating faster processing speeds or lower operating costs per transaction through efficient back-office operations. Fintech firms also pose indirect competition, offering alternative lending and payment solutions that can process loans faster and potentially at lower costs through AI-driven platforms, impacting traditional banks' market share and profitability. BRKL's strategic response involves leveraging its relationship-based model and localized expertise, particularly in real estate lending where its targeted risk assessment contributes to lower default rates compared to some peers. However, maintaining competitiveness necessitates ongoing investment in technology, a factor underscored by the selection of a core banking platform for the combined entity with Berkshire Hills.

BRKL's history includes adapting its business mix. A notable recent strategic decision was the exit from the specialty vehicle finance business in 2024. This move, driven by declining spreads and rising collection costs in that niche, reflects a proactive approach to optimizing the portfolio for profitability and managing risk, even as the runoff of this portfolio presents a slight headwind to overall equipment finance growth. This strategic pruning, alongside intentional reductions in commercial real estate exposure, sets the stage for the company's current phase.

Performance and Portfolio Repositioning

Brookline Bancorp's recent financial performance reflects a company actively managing its balance sheet and income statement in a dynamic rate environment. For the first quarter of 2025, the company reported net income of $19.1 million, or $0.21 per diluted share. This represents a significant 30.2% increase from the $14.7 million, or $0.16 per diluted share, earned in the first quarter of 2024. The improvement was primarily fueled by a $4.2 million increase in net interest income, a notable decrease in the provision for credit losses on loans, and lower non-interest expenses (excluding merger-related charges).

Net interest income rose to $85.8 million in Q1 2025, up from $81.6 million in the prior year period. This expansion drove a 16 basis point increase in the net interest margin, reaching 3.22% compared to 3.06% in Q1 2024. The margin improvement was largely attributable to a 29 basis point decrease in the cost of interest-bearing liabilities, which fell to 3.29%. This was partially offset by a 12 basis point decrease in the yield on interest-earning assets, which stood at 5.67%. The decrease in asset yield reflects lower yields on both investments and the loan portfolio, while the reduction in funding costs highlights the company's ability to manage deposit and borrowing expenses in the current rate environment, including a decrease in average brokered deposit balances and lower borrowing rates.

On the balance sheet, total assets saw a deliberate decrease of $385.5 million, or 13.0% on an annualized basis, in the first quarter of 2025, ending the period at $11.5 billion. This reduction was intentional, driven by planned decreases in cash and cash equivalents and, significantly, in the loan and lease portfolio. Total loans and leases contracted by $136.6 million, or 5.6% annualized, to $9.6 billion. This contraction was concentrated in commercial real estate (down $135.1 million) and equipment finance (down $32 million), reflecting the strategic decision to reduce exposure in these areas and the planned runoff of the specialty vehicle portfolio. Conversely, commercial loans saw growth during the quarter, aligning with the strategy to increase participation in the general C&I markets.

Deposits, the primary source of funding, showed modest growth, increasing by $9.8 million, or 0.4% annualized, to $8.91 billion. Encouragingly, core deposits (demand, NOW, savings, and money market accounts) grew by a stronger $120.6 million, or 7.8% annualized, increasing their share of total deposits to 70.3%. This core deposit growth, coupled with a significant decrease in brokered deposits (down $104.0 million), contributed to the lower cost of funds and improved margin. Total borrowed funds also decreased substantially, falling by $364.0 million to $1.2 billion, primarily due to a reduction in FHLB advances.

The company's capital position remains strong, exceeding all regulatory requirements, with the subsidiary banks classified as well-capitalized. The common equity Tier 1 capital ratio improved to 10.81% as of March 31, 2025, up from 10.46% at the end of 2024. The tangible stockholders equity to tangible assets ratio also increased to 8.73% from 8.27% over the same period, demonstrating solid capital accretion relative to tangible assets.

Managing Credit and Market Risks

Asset quality is a critical focus for Brookline Bancorp, particularly given the current economic uncertainty and higher interest rate environment. While management believes they have navigated through a period of "bumpy" asset quality, specific credit challenges have emerged. Criticized assets, loans requiring closer management attention due to potential weaknesses, increased by $23.2 million to $275.9 million in Q1 2025, driven mainly by increases in construction and equipment financing relationships, partially offset by improvements in multi-family and commercial segments. Nonperforming assets, however, decreased by $6.4 million to $64.0 million, representing 0.56% of total assets, down from 0.59% at the end of 2024. This decrease was primarily in commercial and commercial real estate loans, though partially offset by increases in equipment financing and home equity nonperformers.

Net charge-offs for Q1 2025 totaled $7.6 million, or 0.31% of average loans and leases on an annualized basis. This included a significant $7.1 million charge-off on a large C&I credit in the food manufacturing sector, which had been impacted by a leveraged buyout and was substantially reserved for. This follows a period in late 2024 where specific charge-offs included a grocery loan at Eastern Funding and specialty vehicle loans. The specific allowance for loan and lease losses increased by $1.3 million in Q1 2025, reflecting increased reserves for commercial real estate, commercial, and equipment financing loans. Management's Allowance for Credit Losses (ACL) methodology is robust, incorporating third-party models, economic forecasts, and qualitative adjustments to account for specific portfolio risks (like office and specialty vehicle) and general economic uncertainty. The general reserve on the office book stands at 2.23%, and specific reserves have been allocated to troubled office loans, including a Class B downtown Boston property that is expected to resolve imminently with no anticipated additional loss. While management is optimistic about a return to more normalized credit performance, they acknowledge that post-pandemic struggles in certain businesses and potential tariff implications on segments like equipment finance and manufacturing warrant continued close monitoring and careful underwriting.

Interest rate risk remains a key market risk. The company's asset-liability simulation models indicate that while modestly asset-sensitive, the balance sheet's sensitivity decreased in Q1 2025 compared to year-end 2024, influenced by changes in cash equivalents and interest-bearing non-maturity deposits. The one-year cumulative interest-rate sensitivity gap shifted from negative to positive in Q1 2025. EVE-at-risk simulations show increased liability sensitivity. Management actively manages this risk through various strategies, including adjusting investment and funding maturities and utilizing interest rate swaps as cash flow hedges.

Outlook and the Path Forward

Brookline Bancorp's outlook for 2025 is framed by its strategic repositioning and the impending merger. Management anticipates continued improvement in the net interest margin throughout the year, driven by expectations of further decreases in funding costs. Specifically, they project a 4 to 8 basis point increase in the net interest margin for the second quarter of 2025, though this is dependent on market conditions and the Federal Reserve's actions. The full-year 2025 margin is modeled to potentially reach the low 3.40s by the fourth quarter, assuming a favorable rate environment and deposit dynamics.

Loan portfolio growth is expected to be measured, projected in the low single digits for the balance of 2025. This tempered growth reflects the intentional runoff of the specialty vehicle portfolio and continued lower activity in commercial real estate, offset by targeted growth in commercial and consumer lending. Deposit growth is anticipated to be in the 4% to 5% range, with a focus on attracting and retaining interest-bearing accounts. Management expects the pace of migration from lower-cost deposits to slow but acknowledges that deposit flows and pricing will remain critical variables influencing the margin.

Noninterest income is projected to be in the range of $5 million to $6.5 million per quarter for 2025. Operating expenses are being tightly managed, with a full-year target of $247 million or less, excluding merger-related costs. This reflects cost discipline ahead of the merger and the realized expense savings from exiting the specialty vehicle finance business. The effective tax rate is expected to be around 24.25% for 2025, excluding the impact of non-deductible merger charges.

The most significant factor shaping BRKL's future is the planned merger of equals with Berkshire Hills Bancorp. This all-stock transaction, announced in December 2024, aims to create a $24 billion financial institution with complementary market footprints across the Northeast. The strategic rationale centers on achieving significant economies of scale, leveraging investments, and enhancing profitability metrics. Regulatory applications have been filed, and stockholder meetings for both companies are scheduled for May 21, 2025. Operational planning is well underway, including the selection of a core banking platform and scheduling system conversions for February 2026, aligning with the anticipated closing timeline. This merger represents a transformative step intended to create a more competitive and efficient regional banking franchise.

Competitive Dynamics and Strategic Positioning

In the competitive Northeast market, Brookline Bancorp employs a multi-faceted strategy to differentiate itself. While larger players like Citizens Financial Group benefit from scale and broader reach, and peers like Eastern Bankshares and Independent Bank Corp. have invested significantly in digital capabilities, BRKL emphasizes its community-focused model and relationship banking. Its multi-bank structure allows for local decision-making in credit and pricing, which management believes enhances service levels and motivates bankers, making the company attractive to customers seeking personalized attention, particularly small- and mid-sized businesses.

BRKL's lending portfolio, with a strong concentration in commercial real estate, positions it as a key player in this segment, although it is currently undertaking a strategic reduction in this exposure. Its specialty equipment financing business through Eastern Funding targets specific niches, although the recent exit from specialty vehicles highlights the challenges of maintaining profitability in highly competitive or difficult sub-segments. The wealth management arm, Clarendon Private, though not yet profitable, is growing and attracting customers, primarily from the existing banking base, adding a valuable service offering.

Compared to peers, BRKL's financial performance metrics like Return on Assets and Return on Equity have shown improvement but still reflect the pressures of the current environment and specific credit events. Its net interest margin has demonstrated resilience and is expected to improve, driven by funding cost management. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, BRKL's established presence in its core markets and its strategic focus areas suggest a solid, albeit not dominant, position.

The planned merger with Berkshire Hills is a direct response to the competitive landscape, aiming to achieve the scale and operational efficiencies necessary to compete more effectively. By combining resources and streamlining operations, the merged entity intends to leverage economies of scale to drive profitability, potentially improving metrics like ROIC relative to standalone performance. The selection of a unified core banking platform is a critical step in this process, addressing technological integration and aiming to enhance efficiency. While BRKL's current digital offerings are standard, the merger provides an opportunity to implement a potentially more advanced or integrated platform for the combined entity.

Conclusion

Brookline Bancorp is navigating a period of strategic evolution, marked by intentional portfolio adjustments and a transformative merger on the horizon. The company's recent financial performance, particularly the improving net interest margin and controlled expenses, demonstrates resilience and effective management in a challenging rate environment. While specific credit issues have presented headwinds, management's proactive approach to reserves and risk management provides a degree of confidence in their ability to address these challenges.

The planned merger with Berkshire Hills Bancorp is the central theme shaping BRKL's future. This combination is poised to create a larger, more competitive regional bank, leveraging complementary strengths and operational efficiencies. The successful integration of systems and cultures, alongside the realization of anticipated cost savings, will be critical to unlocking the full value of this transaction. For investors, the story of BRKL is currently one of strategic repositioning and the potential for enhanced scale and profitability through the merger, balanced against the execution risks inherent in such a large-scale integration and the ongoing uncertainties in the economic and interest rate environment. The company's ability to execute its strategic plan, manage credit quality, and successfully integrate with Berkshire Hills will be key determinants of its long-term investment appeal.