Brookline Bancorp Is Offering A 6% Dividend Yield And A Positive Earnings Outlook (BRKL) -LSB

Brookline Bancorp, Inc. earnings. (NASDAQ: NASDAQ:BRILLIANT) is likely to improve next year, as a result of moderate credit growth and low margin expansion. Not repeating merger-related expenses will also make next year’s earnings look better than 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 price target suggests double-digit price growth. As a result, I am endorsing a Buy rating on Brookline Bancorp.

Credit growth is likely to return to a normal rate

Following the acquisition of PCSB Financial in the first quarter of the year, Brookline Bancorp’s loan growth has been quite low in the second and third quarters of this year. After growing by 20.9% in the first quarter of the year, the loan portfolio grew by 1.0% in the second quarter (3.9% p.a.) and 0.5% in the third quarter (2.0% p.a.) of 2023. The five-year compound annual growth rate is 5.9% ; therefore, growth in the last two quarters has been below normal.

Brookline Bancorp operates in parts of Massachusetts, New York and Rhode Island. Unlike the rest of the country, regional job markets in Brookline have largely improved in recent months compared to earlier this year. Massachusetts is showing a marked improvement, which gives me hope that credit growth may be better in the coming quarters compared to the last two quarters.

As a result, I expect the loan portfolio to grow by 1.5% each quarter until the end of 2024 (6.1% annually). The table below shows my balance estimates.

Click to enlarge

Margin is likely to improve

Theoretically, Brookline Bancorp’s net interest margin is positively related to changes in interest rates. This is because most loans have variable rates. As mentioned in presentationfloating-rate loans accounted for 21%, and adjustable-rate loans accounted for 42% of total loans at the end of September 2023. The results of the sensitivity analysis to the policy rate also show that, theoretically, the margin is positively related to interest rate changes the norm.

However, recent empirical evidence contradicts the theoretical link. Brookline Bancorp’s margin has actually declined in every quarter this year as interest rates have risen. The first quarter decline is attributed to the acquisition of PCSB Financial. The decline in subsequent quarters is attributed to a continued deterioration in the deposit mix and a sharp increase in deposit costs.

I believe the deposit mix will stop deteriorating now that the rate hike cycle appears to be over. Each time rates rise, they provide a new incentive for depositors to shift their funds to higher-paying accounts. I expect this yield chase to largely end this quarter. As a result, I expect the margin to perform better in the coming quarters compared to the last two quarters.

Additionally, the eventual repricing 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 higher than average portfolio rates should help to raise the average yield of the portfolio and therefore the margin .

Consequently, I expect the margin to increase by 2 basis points each quarter through the end of 2024.

Revenues are expected to improve next year

Earnings are likely to be higher in 2024 compared to 2023 due to one-time merger-related expenses booked this year. First, provisioning expense was inflated due to the merger in the first quarter. Additionally, operating expenses increased in the first quarter due to the acquisition.

Credit growth and mild margin expansion will also help boost earnings next year, as discussed above. Overall, I expect Brookline Bancorp to report earnings of $0.84 per share for 2023 and $1.19 per share for 2024. The table below shows my earnings statement estimates.

Click to enlarge

The risks of BRKL are moderate

In my opinion, the riskiness of Brookline Bancorp is moderate due to the following two factors.

1. The emergence of telecommuting culture in recent years threatens office real estate loans. As mentioned in the presentation, Brookline’s office loans totaled $771 million at the end of September 2023, which is 8% of total loans. This report is material in my opinion; therefore, I think the office segment is a major source of risk for the company.
2. As mentioned in the presentation, 33% of deposits are uninsured, which is not very 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 only 9% of the total book value of equity. Therefore, unrealized losses are not a primary source of risk for Brookline Bancorp.

Dividend yield over 6%

Brookline Bancorp is offering a high dividend yield of 6.3% with its current quarterly dividend rate of $0.135 per share. 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 looks safe.

Additionally, there are no threats of a dividend cut from regulatory requirements, even though the company’s capital ratios have deteriorated this year. The company reported a total capital ratio of 12.38% at the end of September 2023, up from 14.44% at the end of December 2022, as mentioned in 10-Q filing. The latest reported total capital ratio is still well above the minimum regulatory requirement of 10.5%; therefore, I am not concerned that the regulations may affect the dividend payment.

Approval of a purchase estimate

I’m using the average price-to-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.

Click to enlarge

Multiplying the average P/TB multiple by the estimated tangible book value per share of $10.80 yields a price target of $10.30 for the end of 2024. This price target implies a 20.4% upside from November 10 closing price. The table below shows the sensitivity of the target price to the P/TB ratio.

Click to enlarge

Multiplying the average P/E multiple by the projected earnings per share of $1.19 gives a price target of $8.90 for the end of 2024. This price target implies a 4.1% upside from the closing price of November 10. The table below shows the sensitivity of the target price to the P/E ratio.

Click to enlarge

Equal weighting of the target prices from the two valuation methods yields a combined one target price of $9.60, which means an increase of 12.3% from the current market price. Adding the future dividend yield gives a total expected return of 18.6%. Therefore, I am endorsing a Buy rating on Brookline Bancorp.