KBRA Affirms Ratings for Brookline Bancorp, Inc.
6 Oct 2023 | New York
KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Boston, Massachusetts-based Brookline Bancorp, Inc. (NASDAQ: BRKL) (“Brookline” or “the company”). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for the subsidiary banks, Brookline Bank and Bank Rhode Island. Moreover, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 for the recently acquired subsidiary bank, PCSB Bank. The Outlook for all long-term ratings is Stable.
Key Credit Considerations
Brookline’s ratings are supported by the management team’s substantial experience within its operating markets, having enhanced the company’s core performance and footprint scale over time, with core profitability measures tracking within peer ranges in recent periods, including through 1H23. The reported ROA of 0.52% in 1H23 reflected various one-time merger related expenses totaling $21.4 million in connection with the PCSB Bank merger. However, excluding those non-recurring items, core ROA of 0.86% in 1H23 was generally in line with peers. Given BRKL’s comparatively less favorable funding profile, including a relatively high loan-to-core deposit ratio of ~130% at 2Q23, NIM (3.20% in 2Q23) has contracted by 50 bps since 4Q22, though remained slightly above peer average. NIM pressure is expected to moderate as a result of the combined effect of re-pricing across a lower-duration loan portfolio and a prospectively weaker trend in deposit outflows from DDAs to higher rate CDs and money market accounts. While BRKL's funding costs are expected to remain above peers, we recognize a respectable NIB deposit mix (22% of total deposits in 2Q23), which remains above pre-pandemic levels. Prior to the PCSB Bank merger, BRKL maintained relatively conservative capital measures. The post merger CET1 ratio was closely in line with expectations, though, dropped below the average of similarly-rated peers. KBRA anticipates BRKL’s capital to be managed at or above current levels through the intermediate term via retained earnings and measured loan growth. The company’s reserve coverage (1.35% of loans) provides adequate loss absorption buffers, in our view. Asset quality measures remained manageable despite a modest uptick in nonperforming assets since YE22, with net charge-offs remaining de minimis. However, with more than 45% of the loan portfolio comprised of investor CRE (402% of RBC), CRE concentration tracks above peers, with apartment and retail CRE representing 13% and 9% of total loans, respectively, at 2Q23. The CRE portfolio remained underpinned by strong credit policies and underwriting standards (average LTV of 52%). BRKL’s exposure to office (8% of total loans), primarily consisting of low-rise properties located in suburban areas in Greater Boston, is considered manageable. We consider the economies of the company’s core operating footprint as comparatively stable, supported by lower unemployment rates and diverse industries.
Given the Stable Outlook, a rating upgrade is not expected over the next one to two years. Over the longer term, significantly improved capital measures, meaningful growth in stable fee income, and an improved level of core depository funding, all of which would need to be sustained, could support upward rating momentum. Material deterioration in credit quality measures or regression in regulatory capital ratios, specifically the CET1 ratio, could trigger a negative rating action. Additionally, further elevation in the noncore funding mix, liquidity erosion, or negative earnings trends relative to peers, could pressure the ratings.
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