2023-11-13 15:50:16 ET
Summary
- The recent improvement of local labor markets bodes well for loan growth.
- The margin's declining trend may reverse soon because the up-rate cycle seems to have ended.
- BRKL is offering a dividend yield of 6.3% and a double-digit price upside.
- The risk level appears moderate due to the exposure to office building loans and a sizable balance of uninsured deposits.
Earnings of Brookline Bancorp, Inc. (NASDAQ: BRKL ) will likely improve next year on the back of moderate loan growth and subdued margin expansion. The non-recurrence of merger-related expenses will also make next year’s earnings look better than the earnings for 2023. Overall, I’m expecting Brookline Bancorp to report earnings of $0.84 per share for 2023 and $1.19 per share for 2024. The company is offering an attractive dividend yield. Further, next year’s target price suggests a double-digit price upside. As a result, I’m adopting a buy rating on Brookline Bancorp.
Loan Growth Likely to Return to a Normal Rate
Following the acquisition of PCSB Financial in the 1st quarter of the year, Brookline Bancorp’s loan growth has been quite low in the second and third quarters of this year. After surging by 20.9% in the first quarter of the year, the loan portfolio grew by 1.0% in the second quarter (3.9% annualized) and 0.5% in the third quarter (2.0% annualized) of 2023. The last five-year compounded annual growth rate is 5.9%; therefore, the growth in the last two quarters was below normal.
Brookline Bancorp operates in parts of Massachusetts, New York, and Rhode Island. In contrast to the rest of the country, Brookline’s regional job markets have mostly improved in recent months compared to earlier this year. Massachusetts is especially showing a remarkable improvement, which gives me hope that loan growth can be better in upcoming quarters compared to the last two quarters.
As a result, I’m expecting the loan portfolio to increase by 1.5% in each quarter till the end of 2024 (6.1% annualized). The following table shows my balance sheet estimates.
Financial Position | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
Net Loans | 6,677 | 7,155 | 7,055 | 7,546 | 9,401 | 9,977 |
Growth of Net Loans | 6.9% | 7.2% | (1.4)% | 7.0% | 24.6% | 6.1% |
Securities | 687 | 796 | 750 | 848 | 1,023 | 1,085 |
Deposits | 5,830 | 6,911 | 7,050 | 6,522 | 8,695 | 9,228 |
Borrowings and Sub-Debt | 903 | 844 | 378 | 1,433 | 1,152 | 1,223 |
Common equity | 946 | 942 | 995 | 992 | 1,168 | 1,226 |
Book Value Per Share ($) | 11.84 | 11.91 | 12.72 | 12.83 | 13.16 | 13.81 |
Tangible BVPS ($) | 9.78 | 9.84 | 10.64 | 10.73 | 10.15 | 10.79 |
Source: SEC Filings, Author's Estimates(In USD million unless otherwise specified) |
Margin Improvement Likely
Theoretically, Brookline Bancorp’s net interest margin is positively correlated to interest rate changes. This is because a majority of loans have variable rates. As mentioned in the presentation , floating-rate loans made up 21%, and adjustable-rate loans made up 42% of total loans at the end of September 2023. The results of management’s rate-sensitivity analysis also show that, theoretically, the margin is positively correlated to interest rate changes.
However, recent empirical evidence is contrary to the theoretical link. Brookline Bancorp’s margin has actually decreased in every quarter this year as interest rates have increased. The first quarter’s decline was attributable to the acquisition of PCSB Financial. The decline in subsequent quarters is attributable to a continued deposit mix deterioration and a sharp rise in deposit costs.
I believe the deposit mix will stop worsening now because the up-rate cycle seems to have ended. Every time rates increase, they provide a new incentive to depositors to shift their funds towards higher-paying accounts. I’m expecting this chasing of yields to mostly end this quarter. As a result, I’m expecting the margin to fare better in upcoming quarters compared to the last two quarters.
Moreover, the eventual re-pricing of fixed-rate loans will support the margin. These loans made up 37% of the loan portfolio at the end of September 2023. Furthermore, the production of new loans at rates higher than the portfolio average should help lift the average portfolio yield, and consequently the margin.
Consequently, I’m expecting the margin to grow by 2 basis points in every quarter till the end of 2024.
Expecting Earnings to Improve Next Year
Earnings will likely be higher in 2024 compared to 2023 because of one-time merger-related expenses booked this year. Firstly, the provision expense was bloated due to the merger in the first quarter. Moreover, operating expenses jumped up in the first quarter due to the acquisition.
Loan growth and slight margin expansion will also help increase the earnings next year, as discussed above. Overall, I’m expecting Brookline Bancorp to report earnings of $0.84 per share for 2023 and $1.19 per share for 2024. The following table shows my income statement estimates.
Income Statement | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
Net interest income | 253 | 260 | 282 | 300 | 341 | 359 |
Provision for loan losses | 10 | 62 | (8) | 9 | 39 | 20 |
Non-interest income | 30 | 25 | 27 | 28 | 29 | 22 |
Non-interest expense | 157 | 161 | 163 | 180 | 237 | 228 |
Net income - Common Sh. | 45 | 48 | 115 | 110 | 75 | 105 |
EPS - Diluted ($) | 0.56 | 0.60 | 1.48 | 1.42 | 0.84 | 1.19 |
Source: SEC Filings, Author's Estimates(In USD million unless otherwise specified) |
BRKL’s Risks are Moderate
In my opinion, Brookline Bancorp’s riskiness is moderate due to the following two factors.
- The emergence of the remote working culture over the last few years threatens office real estate loans. As mentioned in the presentation, Brookline’s office loans amounted to $771 million at the end of September 2023, which is 8% of total loans. This proportion is material in my opinion; therefore, I think the office segment is a major source of risk for the company.
- As mentioned in the presentation, 33% of deposits are uninsured, which is not too high but still material in my opinion.
Unrealized losses of the Available-for-Sale securities portfolio amounted to $99.5 million at the end of September 2023, which is just 9% of the total equity book value. Therefore, unrealized losses are not a major source of risk for Brookline Bancorp.
Dividend Yield of Over 6%
Brookline Bancorp is offering a high dividend yield of 6.3% at the current quarterly dividend rate of $0.135 per share. The earnings and dividend estimates suggest a payout ratio of 45.5% for 2024, which is close to the five-year average of 52%. Therefore, the dividend payout appears secure.
Moreover, there are no threats of a dividend cut from regulatory requirements, even though the company’s capital ratios have worsened this year. The company reported a total capital ratio of 12.38% for the end of September 2023, down from 14.44% at the end of December 2022, as mentioned in the 10-Q filing . The last reported total capital ratio is still much higher than the minimum regulatory requirement of 10.5%; therefore, I’m not worried that regulations could affect the dividend payout.
Adopting a Buy Rating
I’m using the peer average price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Brookline Bancorp. Peers are trading at an average P/TB ratio of 0.96 and an average P/E ratio of 7.5, as shown below.
BRKL | DCOM | LBAI | OCFC | FBMS | Average | |
P/E ("ttm") | 8.99 | 6.67 | 7.87 | 6.2 | 9.3 | 7.51 |
P/E ("fwd") | 10.38 | 8.11 | 8.95 | 7.93 | 9.28 | 8.57 |
P/B ("ttm") | 0.66 | 0.69 | 0.67 | 0.48 | 0.88 | 0.68 |
P/TB ("ttm") | 0.85 | 0.81 | 0.88 | 0.7 | 1.43 | 0.96 |
Source: Seeking Alpha |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $10.80 gives a target price of $10.30 for the end of 2024. This price target implies a 20.4% upside from the November 10 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 0.76x | 0.86x | 0.96x | 1.06x | 1.16x |
TBVPS - Dec 2024 ($) | 10.8 | 10.8 | 10.8 | 10.8 | 10.8 |
Target Price ($) | 8.1 | 9.2 | 10.3 | 11.4 | 12.5 |
market Price ($) | 8.6 | 8.6 | 8.6 | 8.6 | 8.6 |
Upside/(Downside) | (4.8)% | 7.8% | 20.4% | 33.0% | 45.6% |
Source: Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $1.19 gives a target price of $8.90 for the end of 2024. This price target implies a 4.1% upside from the November 10 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 5.5x | 6.5x | 7.5x | 8.5x | 9.5x |
EPS 2024 ($) | 1.19 | 1.19 | 1.19 | 1.19 | 1.19 |
Target Price ($) | 6.5 | 7.7 | 8.9 | 10.1 | 11.3 |
Market Price ($) | 8.6 | 8.6 | 8.6 | 8.6 | 8.6 |
Upside/(Downside) | (23.6)% | (9.8)% | 4.1% | 17.9% | 31.8% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $9.60 , which implies a 12.3% upside from the current market price. Adding the forward dividend yield gives a total expected return of 18.6%. Hence, I’m adopting a buy rating on Brookline Bancorp.
For further details see:
Brookline Bancorp Is Offering A 6% Dividend Yield And A Positive Earnings Outlook