KBRA Ratings Boosts Burke & Herbert Financial Services Corp.
Burke & Herbert Financial Services Corp. Receives Ratings from KBRA
New ratings assigned by Kroll Bond Rating Agency (KBRA) indicate a positive outlook for Burke & Herbert Financial Services Corp. (NASDAQ: BHRB) as they receive a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3. The ratings reflect the financial health and operational efficacy of the company and its subsidiary, Burke and Herbert Bank and Trust Company, which earned deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2. All long-term ratings have a Stable Outlook.
Strong Funding Profile and Market Position
The ratings from KBRA are a testament to Burke & Herbert's strong funding profile. The company has shown limited reliance on wholesale borrowings; instead, its core deposits accounted for a significant 85% of total funding in the second quarter of the year. Furthermore, the company has maintained below-average costs, with a total cost of funds of 2.13%, which is notably lower than the average for its peers.
Historically centered in metropolitan areas, the company has successfully diversified its funding base through a recent merger with Summit Financial Group, Inc. This strategic move is expected to enhance the bank's market position and bolster the granularity of its deposit base.
Progress in Lending Strategy
Burke & Herbert has a commendable track record when it comes to credit losses, achieving a net charge-off (NCO) ratio consistently below 0.2% since the last financial crisis, despite an increase to 0.4% in 2010. Acknowledging changes in its lending strategy, KBRA notes the company's shift towards relationship-based lending, enhanced by the merger with Summit. While this new strategy has yet to face the trials of a full credit cycle, previous reports from Summit indicate strong credit quality with NCO ratios at or below 0.1% since 2015.
KBRA has a favorable view of Burke & Herbert’s loan underwriting and review processes, which align well with banks of a similar size and scope. The merger has introduced increased granularity and diversification in Burke & Herbert’s loan offerings, enhancing their competitive advantage.
Heightened Earnings Potential from the Merger
The ongoing effects of the merger are set to positively influence earnings, aligning the company towards a greater concentration of loans in its earning asset mix. Currently, the average loans are projected to constitute close to 75% of average earning assets, compared to historical averages below 60%. This shift will contribute to an immediate enhancement of the net interest margin (NIM), particularly through the utilization of lower-cost funding.
The merger will also impact the capital structure of Burke & Herbert, with said CET1 ratio notably decreasing to 10.9% in the second quarter. However, the company is optimistic about its ability to rejuvenate its capital levels, aiming for a CET1 ratio positioned at the higher end of their peer group.
About KBRA and Their Rating Process
Kroll Bond Rating Agency (KBRA) has established itself as a proficient credit rating agency registered with the U.S. Securities and Exchange Commission. With operations across Europe and the UK, KBRA is recognized for its reliable rating methodologies and transparency in their processes. They assess various factors, together with sensitivity analyses that can lead to upgrades or downgrades in credit ratings.
As Burke & Herbert evolves and meets the demands of the marketplace, the support from KBRA reinforces its reputation and reflects the sound practices that underlie its operations.
Frequently Asked Questions
What ratings did KBRA assign to Burke & Herbert Financial Services Corp.?
KBRA assigned a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 to Burke & Herbert Financial Services Corp.
What supports the ratings assigned by KBRA?
The ratings are supported by Burke & Herbert's strong funding profile, low reliance on wholesale borrowings, and historical performance regarding credit losses.
How has the recent merger affected Burke & Herbert?
The merger with Summit Financial Group has improved Burke & Herbert's market position, enhancing its funding diversity and loan granularity.
What is the expected impact on earnings due to the merger?
The merger is projected to lead to a higher concentration of loans in the earning asset mix, thus boosting net interest margin and earnings.
What future plans does Burke & Herbert have regarding its capital structure?
Burke & Herbert aims to rebuild its capital levels towards the higher end of its peer group following the merger's impact on its CET1 ratio.
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