Burke & Herbert Financial Services Corp. Receives Ratings from KBRA
Kroll Bond Rating Agency (KBRA) has recently assigned positive ratings for Burke & Herbert Financial Services Corp. (NASDAQ: BHRB), including a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3. These ratings are a reflection of the company’s overall financial health and its operational effectiveness, as well as the strong performance of its subsidiary, Burke and Herbert Bank and Trust Company, which has received deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2. Importantly, all long-term ratings currently have a Stable Outlook.
Strong Funding Profile and Market Position
These ratings from KBRA highlight the robust funding profile of Burke & Herbert. The company relies very little on wholesale borrowings; rather, its core deposits make up an impressive 85% of total funding as of the second quarter of the year. Additionally, the firm has effectively kept its costs low, boasting a total cost of funds at 2.13%, which is significantly less than the average among its competitors.
Traditionally focused in metropolitan areas, Burke & Herbert has also broadened its funding base thanks to a recent merger with Summit Financial Group, Inc. This strategic decision is anticipated to strengthen the bank's market presence and improve the diversity of its deposit base.
Progress in Lending Strategy
Burke & Herbert has a strong history of managing credit losses well, consistently maintaining a net charge-off (NCO) ratio below 0.2% since the last financial crisis, although it did peak at 0.4% in 2010. KBRA has noted changes to the company's lending strategy, particularly its move toward relationship-based lending, which has been bolstered by the merger with Summit. Although this new approach has not been tested through a full credit cycle yet, earlier reports from Summit suggest strong credit quality, with NCO ratios at or below 0.1% since 2015.
KBRA views Burke & Herbert's loan underwriting and review processes favorably, indicating they are in line with other banks of similar size and scope. The merger has introduced greater granularity and diversity in Burke & Herbert's loan offerings, providing them with a competitive edge.
Heightened Earnings Potential from the Merger
The effects of the merger are expected to positively influence the company's earnings, leading to a greater concentration of loans within its earning asset mix. Currently, average loans are anticipated to make up nearly 75% of average earning assets, a significant increase compared to historical averages of below 60%. This transition is set to enhance the net interest margin (NIM), particularly through the use of lower-cost funding sources.
The merger will also affect Burke & Herbert's capital structure, as its CET1 ratio has slightly decreased to 10.9% in the second quarter. However, the company remains hopeful about restoring its capital levels, targeting a CET1 ratio that is on the higher end compared to its peer group.
About KBRA and Their Rating Process
Kroll Bond Rating Agency (KBRA) is a well-regarded credit rating agency, registered with the U.S. Securities and Exchange Commission. With operations not only in the U.S. but also across Europe and the UK, KBRA is known for its reliable rating methodologies and transparency. The agency evaluates a variety of factors, including sensitivity analyses that can lead to either upgrades or downgrades in credit ratings.
As Burke & Herbert adapts and meets market demands, the support from KBRA enhances its standing and showcases the sound practices underlying 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.
