Boston-based Brookline (KBRA senior BHC rating: BBB/Stable Outlook) announced on May 24, 2022, a merger agreement with Yorktown Heights, New York-based, PCSB Financial and its subsidiary, PCSB Bank. The proposed transaction, valued at $313 million, is structured with 60% stock and 40% cash, and it reflects a price/tangible book value of about 118%. PCSB Bank will remain a separate bank subsidiary and will join Brookline Bank and Bank Rhode Island as BRKL’s third bank charter. Expected to close in the 2H22, the transaction remains in line with the company’s stated acquisition strategy and is consistent with BRKL’s expansion in suburban markets outside of major metro cities with similar demographics. KBRA considers the proposed transaction complementary to Brookline’s operations, providing scale and market expansion in an attractive metropolitan statistical area (MSA), while offering solid opportunities to leverage BRKL’s more diverse lending products, notably commercial and industrial (C&I), as well as its various specialty business lines, including a nascent wealth management platform.
PCSB is expected to add approximately $2 billion in assets to BRKL’s balance sheet, with pro forma total assets of approximately $10.5 billion, $8.5 billion in loans, and $8.7 billion in deposits, based on financial data as of March 31, 2022. While pro forma loan and deposit compositions are not materially different from Brookline’s current profile, the company will be subject to the Durbin amendment with an estimated $1.5 million (pre-tax) negative impact from lost interchange fee income and increased regulatory requirements, beginning in 3Q23. We consider the impact manageable, specifically considering potential revenue synergies and the estimated 30% cost savings stemming from the merger, primarily driven by back-office consolidation. We consider Brookline’s infrastructure adequately positioned to support the projected balance sheet growth.
Regarding financial metrics, PCSB’s standalone earnings have historically been below peers, partly due to a comparatively lower loan mix and limited fee income. That said, management estimates the pro forma return on assets (ROA) of the combined entity to be near 1.2%, with fully phased-in cost savings. Given the meaningful cash component of the transaction, we anticipate an approximate 100-basis point (bp) impact on capital ratios, including pro forma tangible common equity (TCE) and Common Equity Tier 1 (CET1) ratios, which are projected to edge down to 8.6% and 10.8%, respectively, at the transaction’s close. With BRKL’s projected 12.5% earnings per share (EPS) accretion (including interest rate marks) in 2023, we foresee a potential for capital rebuild to pre-merger levels in a reasonable time.
With respect to asset quality, PCSB displayed relatively manageable measures in recent years, with a nominal net charge-off (NCO) ratio that has tracked below 9 bps since 2017. Nonetheless, as part of the due diligence process, BRKL reviewed 100% of PCSB’s C&I and commercial real estate (CRE) loans with total relationship commitments greater than $4 million and $8 million, respectively, as of March 31, 2022. Additionally, BRKL reviewed 102 individual loans ranging in size from $2 million to $38 million and all classified loans with a balance above $1 million. Brookline’s built-in reserves include an $8.5 million credit mark and CECL Day 1 assumptions of $14.1 million on PCSB’s loan portfolio. Additionally, given the current volatility in the interest rate environment, BRKL modeled a $66 million fair value adjustment reflecting a mark down of the loan and investment securities portfolios and a mark-up on deposits.
KBRA views the overall transaction as in line with prior acquisitions, and therefore neutral to BRKL’s credit ratings in the intermediate term. Given the size of the transaction (about 19% of projected consolidated assets) and considering Brookline’s demonstrated success in prior acquisitions, coupled with the due diligence and portfolio reviews, we expect integration to progress without any major challenges.
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Amina Pare, Associate Director
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Bryan So, Director
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Joe Scott, Senior Managing Director
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Constantine Schidlovsky, Senior Director
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