Summary
- Forgiveness of Paycheck Protection Program Loans in the third and fourth quarters of this year will accelerate the booking of fees and lift earnings.
- Provision expense will likely continue to decline because economic factors are likely to ease.
- The June 2021 target price suggests a high upside from the current market price, which warrants a bullish rating.
- Around 16% of total loans are in payment deferral programs,which shows that BRKL is facing a high level of credit risk.
Brookline Bancorp, Inc. (NASDAQ: BRKL) reported earnings of $0.25 per share in the second quarter, as opposed to a loss of $0.22 per share in the first quarter of 2020. The bottom-line improvement was attributable to a sharp plunge in provision expense. Earnings will likely continue to improve in the year ahead because provision expense will likely decline further. Moreover, BRKL will book fees under the Paycheck Protection Program in an accelerated manner in the second half of the year, which will boost net income. Consequently, I’m expecting BRKL to report earnings of around $0.58 per share in the second half of the year compared to $0.03 per share in the first half. For the full year, I’m expecting BRKL to report earnings of $0.60 per share, down 45% from last year. The June 2021 target price suggests a high upside from the current market price; therefore, I’m bullish on BRKL. However, investors should be cautious of the stock’s high level of risk. BRKL has moderately high exposure to pandemic sensitive loan segments, and around 16% of the total loan portfolio is in payment deferral programs.
Paycheck Protection Program to Add Around $19 million to Net Interest Income
BRKL funded $566 million of loans under the Paycheck Protection Program, or PPP, as mentioned in the second quarter’s investor presentation. According to management’s estimates, BRKL will book $19.37 million in fees under PPP over the life of the loans, which is a maximum of two years. The management expects a large portion of PPP loans to get forgiven in the third or fourth quarters, as mentioned in the second quarter’s conference call. Hence, I’m expecting the company to accelerate the booking of fees under the program in the second half of the year, which will boost net interest income.
Net Interest Income to Remain Lackluster Excluding the Paycheck Protection Program
Excluding the impact of PPP, there is very little chance of an improvement in net interest income as a slight decline in loan balances will likely counter a slight expansion in net interest margin, NIM. The management expects loans, excluding PPP, to be flat or down in the year ahead, as mentioned in the conference call. Additionally, management expects to reduce its excess cash in the future, but not redeploy it into loans or securities due to limited opportunities. I’m expecting the uncertainties related to the COVID-19 pandemic and the upcoming presidential elections to keep the demand for commercial loans subdued. Based on the factors mentioned above and management’s guidance, I’m expecting BRKL to end the year with a loan balance of $6.7 billion, down 8% from the end of June, and up 0.6% from the end of 2019. My estimate includes PPP loans, the majority of which I’m expecting to get forgiven in the remainder of this year. The following table shows my estimates for loans and other balance sheet items.
