Brookline Bancorp, Inc. (NASDAQ:BRKL) posted a loss of $0.22 per share in the first quarter versus a profit of $0.28 per share in the last quarter of 2019. The company's bottom line will likely return to being in the black in the second quarter as provision expense will likely decline. However, the provision expense will likely remain above normal due to incremental worsening of economic variables and exposure to some COVID-19 sensitive industries. Additionally, the net interest margin will likely decline in the year ahead due to the March rate cuts, which will keep earnings below the 2019 level. For the full year, I'm expecting earnings to decline by 71% year-over-year to $0.32 per share. The uncertainties surrounding the COVID-19 pandemic have increased the chances of actual earnings differing materially from estimates. The December 2020 target price suggests a high upside from the current market price. However, like other bank holding companies, BRKL will likely trade at a discount to its fair value in the near-term due to the uncertainties. As a result, I'm adopting a neutral rating on the stock.
Some Sectors to Keep Provision Expense Above Normal in the Second Quarter
BRKL's provision expense surged to $54.1 million in the first quarter from $3.6 million in the last quarter of 2019. The management used Moody's economic forecasts to determine the provisioning for loan losses in the first quarter. As mentioned in the first quarter's investor presentation, the management assumed an average unemployment rate of 6.3% for 2020. The following table from the presentation shows some of the key assumptions.
Based on the double-digit unemployment rate for April and May and the high level of jobless claims, I'm expecting the average unemployment rate to be in the high single digits for 2020. As the unemployment rate incorporated in the first quarter's reserves was not severe enough, I'm expecting BRKL to make some adjustments to the loan loss reserves in the second quarter. Consequently, I'm expecting the provision expense to remain above normal in the second quarter before normalizing in the second half of the year.
Further, some loan segments will push up provisioning for loan losses. As mentioned in the presentation, BRKL had given $163 million worth of equipment finance loans to the fitness industry as of March 31, 2020, representing 2.4% of total loans. Out of all loan categories, the management is the most concerned about the loans to the fitness industry, as mentioned in the first quarter's conference call. Additionally, the hotel industry made up 2.1% of total loans, food and lodging made up 2.6%, and arts and recreation made up 0.8% of total loans as of the end of the first quarter, as mentioned in the presentation. The exposure to these COVID-19 sensitive industries will likely drive provision expense in the second quarter.
Considering the factors mentioned above, I'm expecting BRKL to book provisions expense of $78.9 million in 2020, up from $9.6 million in 2019.
Deposit Mix Changes to Mitigate Impact of Rate Decline
BRKL's net interest margin, NIM, declined by 23bps in the first quarter. I'm expecting the 150bps federal funds rate cuts in March to further compress NIM in the second quarter. The results of a simulation conducted by the management show that BRKL's NIM was quite rate-sensitive at the end of the first quarter. A 100bps decline in interest rates could reduce net interest income by 4.3%, as shown in the table below from the first quarter's 10-Q filing.
The actual impact of the rate decline will likely be less than what the simulation results imply because the deposit mix will most probably shift towards low-cost deposits in the year ahead. As mentioned in the conference call, the demand for certificates of deposits has declined as people are favoring liquidity amid the COVID-19 pandemic. Moreover, a significant proportion of certificates of deposits, CDs, will mature this year, which will lower deposit costs and ease the pressure on NIM. As mentioned in the last 10-K filing, $1.38 billion worth of CDs will mature in 2020, representing 24% of total deposits. Considering these factors, I'm expecting NIM to decline by 17bps in the second quarter, and by 39bps in the full year. The following table shows my estimates for yield, cost, and NIM.
Loan growth on the back of the Paycheck Protection Program, PPP, will partially offset the impact of NIM decline on net interest income. As mentioned in the presentation, the Small Business Administration has approved $518 million of loans under PPP for BRKL. Consequently, I'm expecting BRKL's loan portfolio to increase by 8% till the end of June 2020 over March 2020. I'm expecting a majority of the PPP loans to get forgiven in the third quarter; hence, I'm expecting the loan portfolio to decline by 7% till September-end from June-end. Further, I'm expecting BRKL to end the year with a net loan balance of $6.8 billion, up 2.4% from the end of 2019. The following table shows my estimates for balance sheet items.
Earnings Per Share Likely to Plunge by 71%
The decline in provision expense will help the bottom line recover from the first quarter's loss in the year ahead. However, earnings for the full year will likely remain far below the 2019 level due to above-normal provision expense in the first half of the year and a decline in NIM. Overall, I'm expecting earnings per share to decline by 71% year-over-year to $0.32 in 2020. The following table shows my income statement estimates. 
The probability of actual results differing materially from estimates is unusually high this year due to the uncertainties surrounding the severity and duration of the COVID-19 pandemic. If the pandemic lasts longer than expected, or if it's more severe than expected, then the provision expense can exceed its estimate. Due to the uncertainties, I'm expecting BRKL to continue to trade at a discount to its fair value in the near-term of three to four months.
Expecting a Dividend Yield of 4.3%
I'm expecting BRKL to maintain its quarterly dividend at the current level of $0.115 per share. The dividend and earnings estimates suggest a payout ratio of 143% for 2020; however, I'm not anticipating a dividend cut because the cash dividend is a relatively small claim on capital. The quarterly dividend of $0.115 per share will lead to a total dividend payout of $36.7 million, which is quite small compared to the excess tier I capital. As reported in the presentation, BRKL has $182.6 million in tier I capital over and above the regulatory requirements for maintaining a minimum 8% tier-I-to-risk-weighted-assets ratio. As a result, I believe BRKL will prefer to slightly reduce capital by paying dividends over sending a negative signal to investors by cutting dividends. The dividend estimate for 2020 implies a dividend yield of 4.3%.
Year-end Target Price Suggests 32% Upside
I'm using the historical price-to-book multiple, P/B, to value BRKL. The stock has traded at an average P/B ratio of 1.22 in the past, as shown below. 
Multiplying the average P/B ratio with the forecast book value per share of $11.6 gives a December 2020 target price of $14.2. This target implies an upside of 32% from BRKL's June 6 closing price. The following table presents the sensitivity of the target price to the P/B multiple.
The upside shows that BRKL is a feasible investment for a holding period of six to seven months. However, I'm expecting the stock price to remain down in the near-term of three to four months. BRKL will likely continue to trade at a significant discount to its target price until some of the uncertainty is cleared, as discussed above. Consequently, I'm adopting a neutral rating on BRKL.
