Boston Banking Bet

07/15/2005 12:00 am EST

Focus:

Doug Hughes

Editor, BankNewsLetter.com

Doug Hughes epitomizes the type of analyst that develops a noted expertise in a highly specific area. The editor of The BankStock Newsletter , he is a specialist in regional banks, focusing on those offering takeover appeal. Here, he looks at a small banking bet in Boston.

"Brookline Bancorp (BRKL NASDAQ) has $2.1 billion in assets with 15 locations serving the Greater Boston area," notes Doug Hughes. "The bank just added seven locations after their merger with Medford Bank; while they don’t have the large deposit base Brookline has, it is a great fit for them and a great operation also. First, they keep giving more and more cash back to shareholders; they seem committed to shareholder value. Second, they are making more and more money in a rising rate environment. Third, insiders own a bunch, about 5%. Fourth, they have many key locations that cannot be replaced that someone else will want someday.

"Fifth, asset quality is the best with reserves at 1.35% of total loans and non-performing loans at 0.10%, very strong. Their book value keeps going up, almost $10.00 a share and they have to be worth at least 2.2 times book or $21.80+ a share for a 40% premium to today’s prices. Their three-year period is up next month and this alone should cause takeout speculation and get the stock up 10% this year. Sixth, their strong cash dividend should keep the downside risk low at around the $15 area.

"Seventh, they should have better and better earnings growth once Medford is fully integrated. Eighth, the company’s compensation committee in March determined the bonus criteria for the three senior officers under the Annual Senior Executive Officer Incentive Compensation Plan, that 80% of the annual bonus will be tied to operating results, and the remaining 20% will be tied to asset quality (all banks should do this). In fact with all companies this is something we really like.

"Brookline has been accused in the past of wasting money and not making enough money. It looks like things are changing for the better. The bottom line is, their asset quality is the best, and they have several large key locations that someone will want soon, which makes them very attractive. We get paid to wait with low downside risk. They have around 60 million shares outstanding. Accumulate now under $15.75 and buy all you can on any pullbacks under $15.25. The stock does trade a little choppy, buy it slowly, but it does trade plenty. Buy it on down days."

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