KBRA Affirms Ratings for Berkshire Hills Bancorp, Inc.
9 May 2025 | 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 Berkshire Hills Bancorp, Inc. (NYSE: BHLB)(“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 its subsidiary, Berkshire Bank. The Outlook for all long-term ratings is Stable.
Key Credit Considerations
The ratings for BHLB are supported by above-average capital levels and an improved funding profile in recent years that has enabled the company to generate a slightly better than rated-peer NIM with core earnings generally tracking in line with peers. Although BHLB’s capital ratios have experienced some fluctuations in recent years, driven by various transactions included in its multi-year plan to strengthen the balance sheet, the company has consistently maintained its capital ratios above the rated peer average, dating back to 2020. The recent increase in reported capital ratios in 4Q24 (CET1 ratio pushed above 13%) was largely driven by a $100 million common equity raise completed as part of the company’s recently announced merger agreement with Brookline Bancorp, Inc. (NASDAQ: BRKL). While proforma capital ratios will be materially lower than peer post-merger (proforma CET1 ratio of 9.8%), the company expects to rebuild its capital ratios in a rather timely manner.
The successful execution of the company’s plan to improve its funding profile in prior years is reflected in its below-average deposit costs (2.18% for 1Q25) and its moderate usage of wholesale funding (core deposits comprised 85% of liabilities at 4Q24). As such, the company has been able to offset a lower-yielding earning asset mix, in particular, BHLB’s $1.2 billion investment portfolio, which has materially underperformed when compared to rated peers. BHLB’s reported results have been impacted by several one-time items over the last two years, including the sale of branch locations ($16 million gain in 2024) and the repositioning of lower-yielding securities ($50 million loss in 2024). However, on an adjusted basis, BHLB's operating returns were consistent and in line with rated peers with a core ROAA of 0.81% and 0.79%, in 2024 and 2023, respectively (BHLB reported operating ROAA of 0.94% for 1Q25).
On December 16, 2024, BHLB announced a definitive merger agreement with Brookline Bancorp, Inc., pursuant to which BRKL will merge with and into BHLB in an all-stock transaction valued at $1.1 billion, with an expected closing date during the second half of 2025 (BHLB will be the legal acquirer with BRKL the accounting acquirer). The transaction provides both companies with meaningful scale and a more diversified geographic footprint with proforma assets of $24 billion, $19 billion in loans, and $18 billion in deposits.
Rating Sensitivities
The Stable Outlook is reflective of KBRA’s view that a rating change is unlikely over the medium term. However, the successful execution of the company’s pending merger, to include the rapid rebuild of capital ratios, aligning with higher rated peers as well as maintenance of peer-like funding and a material increase in noninterest income could result in positive ratings momentum over time. Conversely, the poor execution of the pending merger, including the lack of rebuild in capital along with deterioration in credit, with credit losses measurably above rated peers, could result in negative ratings action.
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