KBRA Comments on Proposed Acquisition of PCSB Financial Corporation by Brookline Bancorp, Inc.

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NEW YORK–(BUSINESS WIRE)–KBRA comments on the proposed acquisition of PCSB Financial Corporation (NASDAQ: PCSB) by Brookline Bancorp, Inc. (NASDAQ: BRKL) (Brookline or the Company).

Boston-based Brookline (KBRA senior BHC rating: BBB/Stable Outlook) announced on May 24, 2022 a merger agreement with PCSB Financial, based in Yorktown Heights, New York, and its subsidiary, PCSB Bank. The proposed transaction, valued at $313 million, is structured with 60% equity and 40% cash, and reflects a tangible price/book value of approximately 118%. PCSB Bank will remain a separate banking subsidiary and join Brookline Bank and Bank Rhode Island as BRKL’s third charter bank. Scheduled to close in 2H22, the transaction remains in line with the company’s stated acquisition strategy and is consistent with BRKL’s expansion into suburban markets outside of major metropolitan cities with similar demographics. KBRA views the proposed transaction as complementary to Brookline’s operations, providing scale and market expansion in an attractive Metropolitan Statistical Area (MSA), while providing strong opportunities to leverage BRKL’s more diversified lending products, including commercial and industrial (C&I), as well as its various specialist businesses, including a nascent wealth management platform.

The 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. Although 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 negative impact of 1 $.5 million (pretax) from lost interchange fee revenue and increased regulatory requirements, effective 3Q23. We consider the impact to be manageable, particularly given the potential revenue synergies and estimated 30% cost savings resulting from the merger, mainly due to the consolidation of the back office. We believe Brookline’s infrastructure is well positioned to support projected balance sheet growth.

On financial metrics, PCSB’s own-source earnings have historically lagged their peers, in part due to a relatively lower loan mix and limited fee income. That said, management estimates the combined entity’s pro forma return on assets (ROA) at nearly 1.2%, with fully incremental cost savings. Given the large cash component of the transaction, we expect an impact of approximately 100 basis points (bps) on capital ratios, including pro forma tangible common equity (TCE) and Common Equity Tier ratios 1 (CET1), which are expected to decline slightly to 8.6% and 10.8%, respectively, upon closing of the transaction. With BRKL’s expected 12.5% ​​increase in earnings per share (EPS) (including interest rates) in 2023, we see the potential to rebuild capital to pre-merger levels within a reasonable time frame. .

Regarding asset quality, the PCSB has shown relatively manageable metrics in recent years, with a nominal net charge ratio (NCO) below 9 basis points since 2017. Nonetheless, as part of the due diligence process , BRKL has 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. In addition, BRKL has reviewed 102 loans individual loans ranging in size from $2 million to $38 million and all classified loans with a balance greater than $1 million. Brookline’s embedded reserves include an $8.5 million credit mark and $14.1 million CECL Day 1 assumptions on PCSB’s loan portfolio. In addition, given the current volatility in the interest rate environment, BRKL has modeled a fair value adjustment of $66 million reflecting a decline in loan and investment securities portfolios and a mark-up on deposits.

KBRA considers the overall transaction to be in line with previous acquisitions, and therefore neutral for BRKL’s credit ratings in the medium term. Given the size of the transaction (approximately 19% of projected consolidated assets) and given Brookline’s demonstrated success in prior acquisitions, coupled with due diligence and portfolio reviews, we expect the integration is progressing without any major challenges.

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KBRA is a full-service credit rating agency registered in the US, EU and UK, and is appointed to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in several jurisdictions.

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