KBRA Affirms Ratings for Burke & Herbert Financial Services Corp.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Alexandria, VA based, Burke & Herbert Financial Services Corp. (NASDAQ: BHRB)(“the company”). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 for its subsidiary, Burke and Herbert Bank and Trust Company. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by BHRB’s solid funding profile that includes a mix of large depositors from higher net-worth individuals in large metro markets (Washington, D.C.) and durable, more granular deposits from stable secondary markets, giving the company a lower-cost and stable core deposit base (total cost of deposits was 1.89% for 2Q25) along with ample opportunities for growth. Furthermore, KBRA maintains a favorable view towards BHRB’s rather conservative management of capital, historically operating with above-average capital ratios. While the company's merger completed in 2Q24 with Summit Financial Group, Inc. ("Summit") caused capital ratios to fall below peers, BHRB was able to quickly rebuild its capital levels, adding over 100 bps to measures in the past year, including ~130 bps to its CET1 ratio with a reported 12.2% at 2Q25, reflective of the company's ability and commitment to building capital, with capital ratios expected to continue to trend higher over the near term.

BHRB has reported above-average earnings since the completion of its merger with Summit (including an ROAA of 1.45% for 1H25), in part, due to loan accretion income, which totaled $23 million in 1H25 (BHRB reported an $11 million total net impact of accretion on net income, adding approximately 23 bps to ROAA). Nevertheless, excluding accretion income, NIM tracked above rated peers, benefitting from lower funding costs driven by its strong core deposit base and limited usage of wholesale funding. BHRB has a long history of outperformance with regards to credit losses with an NCO ratio tracking below 0.2% since the GFC, when the company’s NCO ratio peaked at 0.4% in 2010. With that said, NPAs were comparatively elevated at 2Q25 (BHRB reported an NPA ratio of 1.58%), in part, due to its higher concentration of investor CRE loans (55% of total loans, or 318% of risk-based capital) which included meaningful office exposure ($490 million at 2Q25, or 50% of risk-based capital). However, the office portfolio is largely smaller, suburban properties, with limited exposure to Washington, D.C. with recent credit trends relatively stable. Moreover, the company continues to execute on its plan to better diversify the loan portfolio following the Summit merger, with C&I loans comprising 21% of total loans at 2Q25 (includes owner-occupied CRE).

Rating Sensitivities

The Stable Outlook reflects KBRA's view that a rating change is unlikely in the medium term. However, the continued increase in diversification within the loan portfolio, more specifically, a meaningful reduction in its CRE concentration, coupled with greater revenue contributions from its fee generating business lines, could result in positive rating momentum over time. Conversely, should credit headwinds arise, resulting in materially elevated credit losses that impact the profitability of the company, negative rating action could occur.

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