Brookline Bancorp, Inc. (NASDAQ: BRKL) is anticipated to experience some support in earnings from loan growth recovery. However, a lower net interest margin is expected to drag earnings down.
The company is projected to report earnings of $0.87 per share for 2024, reflecting a 3.1% year-over-year increase. This revised estimate is lower than previous expectations due to missed targets in loan growth and net interest margin for the first quarter of 2024.
Despite the lower earnings projection, Brookline Bancorp’s stock presents a high price upside from the current market price, coupled with a substantial dividend yield of over 6%.
Margin Trends in a Falling Rate Environment
Brookline Bancorp’s net interest margin contracted by 9 basis points in the first quarter of 2024, underperforming expectations. This contraction marks the fifth consecutive quarter of declining margins.
A significant factor contributing to the margin compression is the continued shift in the deposit mix, with deposits moving from non-interest-bearing accounts to interest-bearing accounts, particularly savings and time deposits.
The upcoming interest rate cuts are expected to reduce the attractiveness of high-rate accounts relative to non-interest-bearing accounts, potentially stabilizing the deposit mix and alleviating some pressure on the margin. However, these interest rate cuts could directly impact the margin negatively.
With approximately 22% of loans being floating-rate and 39% being adjustable-rate, the average loan yield is likely to decrease rapidly in response to rate cuts. According to management’s rate-sensitivity analysis in the 10-Q filing, a 100-basis point rate cut could reduce net interest income by 1.3% over twelve months.
Considering these factors, the margin is expected to grow by only 2 basis points each quarter until the end of 2024, leading to a full-year average margin of 3.07%. This new margin estimate is lower than the previous forecast due to the underperformance in the first quarter.
Loan Growth Prospects
In the first quarter of 2024, the loan portfolio grew marginally by 0.1%, significantly lower than the average growth of 1.4% in the last three quarters of 2023. This growth also missed the previous expectations.
Management has projected an overall loan growth of 1% to 4% for 2024, primarily driven by commercial and industrial (C&I) and equipment finance segments.
Brookline Bancorp operates in Massachusetts, New York, and Rhode Island through its three subsidiary banks: Brookline Bank, Bank Rhode Island, and PCSB Bank. While the Massachusetts labor market appears strong, the labor markets in New York and Rhode Island are lagging.
Considering the regional labor markets’ conditions, which directly impact regional business activity and loan demand, the loan portfolio is expected to grow by 1.0% in each of the last three quarters of 2024, resulting in a full-year loan growth of 3.2%.
This projection is toward the higher end of management’s guidance but lower than previous estimates.
Earnings and Financial Projections
Based on the estimated balance sheet and projected margin, the net interest income for 2024 is expected to be lower than that of 2023. Additional assumptions include:
- Quarterly provisioning for loan losses is expected to be around 0.05% of total loans, consistent with the average for the last four quarters.
- Non-interest income is expected to revert to normal levels following a dip in the first quarter.
- Non-interest expense growth is anticipated to remain stable, in line with recent trends.
These assumptions lead to an earnings estimate of $0.87 per share for 2024, a 3.1% increase year-over-year. This estimate is a reduction from the previous projection of $1.19 per share due to lower-than-expected loan growth and margin changes in the first quarter.
Risk Assessment
Brookline Bancorp’s risk level is considered low due to several factors:
- Non-performing loans were 0.42% of total loans at the end of March 2024, indicating satisfactory credit risk.
- Uninsured deposits account for 26% of total deposits, which is not excessively high.
- Net unrealized losses totaled $76 million, approximately 6% of total equity.
- Office loans made up 8% of total loans, a material but manageable exposure.
Dividend Yield and Valuation
Brookline Bancorp offers a high dividend yield of 6.2% at the current quarterly payout of $0.135 per share. The dividend payout appears secure due to the following reasons:
The projected earnings and current dividend suggest a payout ratio of 61.8%, close to last year’s payout ratio of 63.6%.
- Excess capital above regulatory requirements amounted to $228 million, compared to the annual dividend amount of $48 million, ensuring the dividend payout is not threatened by regulatory capital requirements.
The valuation of Brookline Bancorp is based on the peer average price-to-tangible book (P/TB) and price-to-earnings (P/E) multiples. Peers are trading at an average P/TB ratio of 1.18 and an average P/E ratio of 9.8. Using these multiples:
- Applying the average P/TB multiple to the forecast tangible book value per share of $10.7 gives a target price of $12.6 for the end of 2024, implying a 44.8% upside.
- Applying the average P/E multiple to the forecast earnings per share of $0.87 gives a target price of $8.6 for the end of 2024, implying a 1.7% downside.
Equally weighting the target prices from both valuation methods results in a combined target price of $10.6, implying a 21.6% upside. Adding the forward dividend yield gives a total expected return of 27.7%.
Conclusion
Despite the reduction in the earnings estimate for 2024, the updated target price is higher due to increased peer multiples. With a total expected return of 27.7%, Brookline Bancorp is an attractive investment.
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