The top line of Brookline Bancorp (NASDAQ: BRKL) will likely grow strongly this year because of a well-positioned balance sheet that will benefit from the rising interest-rate environment. Further, the strong loan growth witnessed in the last quarter will likely continue through 2022 because of economic strength and robust pipelines. However, the top-line growth will likely be unable to cancel out the earnings pressure from higher provisioning and operating expenses. Overall, I’m expecting Brookline Bancorp to report earnings of $1.38 per share in 2022, down 7% year-over-year. The year-end target price suggests a small upside from the current market price. As a result, I’m adopting a Hold rating on Brookline Bancorp.
Fluid Yields, Stickier Costs to Boost the Margin Amid Higher Rates
The anticipated 75 to 100 basis point hike in the federal funds rate will likely be one of the biggest drivers of earnings growth in 2022. This is because Brookline Bancorp is well-positioned to benefit from the rising interest-rate environment. Adjustable and floating-rate loans made up around 62% of total loans at the end of December 2021, as mentioned in the earnings presentation. Therefore, a majority of the portfolio will re-price soon after the rate hike.
Moreover, Brookline Bancorp has successfully turned its deposit cost stickier during 2021. Non-interest-bearing deposits increased to 26.8% of total deposits by the end of December 2021 from 23.0% at the end of December 2020 and 19.6% at the end of December 2019. The higher proportion of non-interest-bearing deposits will make the average deposit cost upwards sticky in a rising interest-rate environment.
The management’s interest-rate sensitivity analysis shows that a 100-basis points increase in the interest rate can boost the net interest income by around 4.0% over 12 months, as mentioned in the presentation and shown below.
Considering the factors mentioned above, I’m expecting the net interest margin to increase by 6 basis points in 2022 from 3.52% in the last quarter of 2021.
Loan Growth Likely to Continue to Gain Momentum
After declining by 4.6% in the first nine months of 2021, the loan portfolio turned around and grew by a strong 3.3% in the last quarter of 2021. The management mentioned in the presentation that its lending pipelines are currently quite strong across all business lines, which bodes well for near-term loan growth.
Moreover, economic strength will ensure that the positive loan growth momentum continues through 2022. Brookline Bancorp operates in the states of Massachusetts and Rhode Island. While Massachusetts’ unemployment rate is at par with the national average, Rhode Island’s job market seems to be lagging. Nevertheless, both markets have improved tremendously from the beginning of the pandemic, as shown below.
However, the upcoming forgiveness of the remaining Paycheck Protection Program (“PPP”) loans will likely have a slight negative impact on the total loan portfolio size. As mentioned in the presentation, PPP loans outstanding totaled $68 million at the end of December 2021, representing 1.0% of total loans. The management mentioned in the conference call that it expects these loans to be largely gone by the end of the first quarter. As a result, PPP forgiveness will have a small impact on the total loan portfolio size in early 2022.
Brookline Bancorp’s loans have grown in the mid-to-high-single-digit range in the past. Given that the economy is close to the pre-pandemic level, I believe Brookline will easily achieve mid-single-digit loan growth in 2022. Considering these factors, I’m expecting the loan portfolio to increase by 6% by the end of December 2022 from the end of 2021. Meanwhile, deposits and other balance sheet items will likely grow in tandem with loans. The following table shows my balance sheet estimates.
FY17 | FY18 | FY19 | FY20 | FY21 | FY22E | |
Financial Position | ||||||
Net Loans | 5,672 | 6,245 | 6,677 | 7,155 | 7,055 | 7,488 |
Growth of Net Loans | 6.1% | 10.1% | 6.9% | 7.2% | (1.4)% | 6.1% |
Securities | 749 | 730 | 687 | 796 | 750 | 796 |
Deposits | 4,871 | 5,454 | 5,830 | 6,911 | 7,050 | 7,483 |
Borrowings and Sub-Debt | 1,029 | 928 | 903 | 844 | 378 | 401 |
Common equity | 804 | 900 | 946 | 942 | 995 | 1,064 |
Book Value Per Share ($) | 10.74 | 11.26 | 11.84 | 11.91 | 12.72 | 13.60 |
Tangible BVPS ($) | 8.82 | 9.18 | 9.78 | 9.84 | 10.64 | 11.52 |
Source: SEC Filings, Author’s Estimates (In USD million unless otherwise specified) |
High Allowances to Let This Year’s Provisioning Remain Subdued
The anticipated loan additions will require provisioning for expected loan losses; therefore, the provisioning this year will likely be higher than last year. However, the net provisioning is unlikely to return to the pre-pandemic level because reversals will likely remain higher than normal. This is because the existing allowances appear excessively high relative to the portfolio’s credit risk. As mentioned in the presentation, allowances made up 1.38% of total loans, while non-performing loans made up just 0.45% of total loans at the end of December 2021.
Overall, I’m expecting the provision expense, net of reversals, to make up 0.11% of total loans in 2022. In comparison, the net provisioning expense made up 0.19% of total loans from 2016 to 2019.
Expecting Earnings to Dip by 7%
The higher net provisioning will likely drag earnings this year. Further, the non-interest income will likely be lower this year because the company reported a high loan level derivative income of $3.8 million in the fourth quarter of 2021, which is unlikely to be repeated this year. Moreover, the core operating expenses will likely be higher this year because of inflationary pressures and planned investments, as mentioned in the conference call.
On the other hand, margin expansion and strong loan growth will likely support earnings. Overall, I’m expecting the company to report earnings of $1.38 per share in 2022, down 7% year-over-year. The following table shows my income statement estimates.
FY17 | FY18 | FY19 | FY20 | FY21 | FY22E | |
Income Statement | ||||||
Net interest income | 223 | 248 | 253 | 260 | 282 | 302 |
Provision for loan losses | 19 | 5 | 10 | 62 | (8) | 8 |
Non-interest income | 32 | 25 | 30 | 25 | 27 | 24 |
Non-interest expense | 139 | 155 | 157 | 161 | 163 | 174 |
Net income – Common Sh. | 51 | 83 | 88 | 48 | 115 | 108 |
EPS – Diluted ($) | 0.68 | 1.04 | 1.10 | 0.60 | 1.48 | 1.38 |
Source: SEC Filings, Author’s Estimates (In USD million unless otherwise specified) |
Actual earnings may differ materially from estimates because of the risks and uncertainties related to the COVID-19 pandemic, especially the Omicron Variant.
Small Total Expected Return Justifies a Hold Rating
Brookline Bancorp is offering a dividend yield of 2.9% at the current quarterly dividend rate of $0.125 per share. The earnings and dividend estimates suggest a payout ratio of 36% for 2022, which is below the 2016-2019 average of 45%. Therefore, there is room for a dividend hike. Nevertheless, to remain on the safe side, I have assumed the maintenance of the status quo this year.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Brookline Bancorp. The stock has traded at an average P/TB ratio of 1.36 in the past, as shown below.
FY19 | FY20 | FY21 | Average | ||||
T. Book Value per Share ($) | 9.8 | 9.8 | 10.6 | ||||
Average Market Price ($) | 15.0 | 11.1 | 15.1 | ||||
Historical P/TB | 1.54x | 1.13x | 1.42x | 1.36x | |||
Source: Company Financials, Yahoo Finance, Author’s Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $11.5 gives a target price of $15.7 for the end of 2022. This price target implies an 8.1% downside from the January 28 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 1.16x | 1.26x | 1.36x | 1.46x | 1.56x |
TBVPS – Dec 2022 ($) | 11.5 | 11.5 | 11.5 | 11.5 | 11.5 |
Target Price ($) | 13.4 | 14.5 | 15.7 | 16.9 | 18.0 |
Market Price ($) | 17.1 | 17.1 | 17.1 | 17.1 | 17.1 |
Upside/(Downside) | (21.6)% | (14.8)% | (8.1)% | (1.3)% | 5.4% |
Source: Author’s Estimates |
The stock has traded at an average P/E ratio of around 14.1x in the past, as shown below.
FY19 | FY20 | FY21 | Average | ||||
Earnings per Share ($) | 1.10 | 0.60 | 1.48 | ||||
Average Market Price ($) | 15.0 | 11.1 | 15.1 | ||||
Historical P/E | 13.7x | 18.5x | 10.3x | 14.1x | |||
Source: Company Financials, Yahoo Finance, Author’s Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $1.38 gives a target price of $19.5 for the end of 2022. This price target implies a 13.9% upside from the January 28 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 12.1x | 13.1x | 14.1x | 15.1x | 16.1x |
EPS 2022 ($) | 1.38 | 1.38 | 1.38 | 1.38 | 1.38 |
Target Price ($) | 16.7 | 18.1 | 19.5 | 20.8 | 22.2 |
Market Price ($) | 17.1 | 17.1 | 17.1 | 17.1 | 17.1 |
Upside/(Downside) | (2.2)% | 5.8% | 13.9% | 21.9% | 30.0% |
Source: Author’s Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $17.6, which implies a 2.9% upside from the current market price. Adding the forward dividend yield gives a total expected return of 5.8%. Based on the small total expected return, I’m adopting a Hold rating on Brookline Bancorp.