KBRA Assigns Ratings to Burke & Herbert Financial Services Corp.

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

The ratings are supported by the company’s strong funding profile which includes a limited reliance on wholesale borrowings (core deposits were 85% of total funding at 2Q24) and below-average costs (BHRB’s total cost of funds was 2.13% for 2Q24, 45 bps below the rated peer average). Historically concentrated in the Washington, D.C. metro areas, BHRB’s merger with Summit Financial Group, Inc. ("Summit") (completed 2Q24) further enhances its funding base, by adding greater market diversification and granularity to its deposit base. At close, BHRB had a branch network of over 75 retail offices stretched primarily across parts of MD, VA, and WV with a smaller presence in DE and KY.

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, KBRA recognizes the changes BHRB has made in recent years with regards to its lending strategy (geared more towards relationship based-lending as opposed to its past which included a comparatively elevated concentration in participation lending) that includes the recent merger with Summit and its more traditional community bank loan portfolio. While the company’s new lending strategy has yet to be tested through a credit cycle (we note, Summit has reported strong credit quality with an NCO ratio at or below 0.1% since 2015), KBRA considers its loan underwriting and review practices to be proportionate to banks of similar size and scope. Moreover, KBRA favorably views the greater granularity and diversification (both by loan type and geographically) brought to BHRB through the Summit merger.

Earnings should benefit from the merger as it manages towards a higher concentration of loans within its earning asset mix (average loans are expected to track close to 75% of average earning assets as compared to historical levels that were typically below 60%), providing an immediate boost to NIM and taking advantage of its lower-cost funding. Finally, while the merger materially changed the capital profile of BHRB, with its CET1 ratio falling nearly 600 bps to 10.9% at 2Q24, the company expects to be able to quickly rebuild capital towards its targeted levels with a CET1 ratio expected to track towards the higher-end of the rated peer group.

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